COMMISSION STAFF WORKING DOCUMENT Country Report Portugal 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances {COM(2015) 85 final} This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position.
Date: 2015-02-26
Institutions: European Commission
Subjects: Portugal, economic consequence, economic disparity, economic indicator, economic recession, economic reform, economic stabilisation, employment statistics, fight against unemployment, macroeconomics, marginalisation, poverty, structural adjustment













EUR-Lex - 52015SC0041 - EN











|



52015SC0041

COMMISSION STAFF WORKING DOCUMENT Country Report Portugal 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances  {COM(2015) 85 final}     This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position. /* SWD/2015/0041 final */









 
Executive summary  1
1.       Scene
setter: economic situation and outlook  3
2.       Imbalances,
risks and adjustment 9
2.1.   External
sustainability and competitiveness 10
2.2.   Debt overhang
and deleveraging  18
2.3.   Labour market 25
3.       Other
structural issues 34
3.1.   Taxation,
fiscal framework and other fiscal structural policies 35
3.2.   Social
policies 40
3.3.   Education and
vocational training policies 42
3.4.   Structural
measures to improve competitiveness 44
AA.   Overview
Table  51
AB.   Standard
Tables 62
LIST OF Tables
1.1.     Key
economic, financial and social indicators for Portugal 7
1.2.     The MIP
scoreboard for Portugal 8
2.1.1.  ICOR (5-year
average growth) in selected euro area countries 10
2.1.2.  Structure of
the NIIP  11
2.1.3.  Structure of
goods exports by broad economic category (in %) 16
2.1.4.  World market
shares for services (in %) 16
2.2.1.  Debt-to-equity
and return on equity ratios, broken down by sector 18
2.2.2.  Importance of
SMEs in the Portuguese economy  19
2.2.3.  Corporate
solvency risk heat map   20
AB.1.  Macroeconomic
indicators 60
AB.2.  Financial
market indicators 61
AB.3.  Taxation
indicators 62
AB.4.  Labour market
and social indicators 63
AB.5.  Expenditure on
social protection benefits (% of GDP) 64
AB.6.  Product market
performance and policy indicators 65
AB.7.  Green growth  66
LIST OF Graphs
1.1.     Real GDP
growth and its components 3
1.2.     Poverty
indicators in Portugal 3
1.3.     Contributions
to potential growth in 2003-19  5
2.1.1.  Breakdown of
Portugal's Net International Investment Position (NIIP) 10
2.1.2.  Current
account financing  10
2.1.3.  NIIP
sensitivity to macroeconomic shocks 11
2.1.4.  External
position and its components 12
2.1.5.  Net lending/
borrowing by sector 12
2.1.6.  Portugal's
headline and structural current account balance  12
2.1.7.  Breakdown of
Portugal's current account into cyclical and structural components 12
2.1.8.  Imports and
exports of goods and services as a proportion of GDP  13
2.1.9.  Nominal ULC
trends in tradable and non-tradable sectors 13
2.1.10.          Relative
prices of tradables and non-tradables in Portugal 14
2.1.11.          Real
effective exchange rates in relation to the EA-17  14
2.1.12.          Average
growth rate in profit margins (2010-13) 14
2.1.13.          PULCs,
quality and prices of Portuguese exports, by comparison with the EU28 average  15
2.1.14.          Geographical
and sectoral breakdown of export market share growth in Portugal 15
2.2.1.  Household
indebtedness as a percentage of GDP  17
2.2.2.  Private NFC
indebtedness as a percentage of GDP  17
2.2.3.  Breakdown by
sector, total debt-to-GDP ratios 18
2.2.4.  Distribution
of corporate solvency risk by sector 20
2.2.5.  Macroeconomic
risk - growth and interest rates 22
2.2.6.  Fiscal
consolidation and ageing costs 22
2.3.1.  Employment and
unemployment 24
2.3.2.  Employment and
unemployment rates and long-term unemployment 24
2.3.3.  Unemployment
rate, actual and predicted based on Okun's law   25
2.3.4.  Real
compensation per employee and labour productivity  25
2.3.5.  Nominal unit
labour costs 26
2.3.6.  Gap between
employment growth in the tradable and in the non-tradable sectors: 2010-13  26
2.3.7.  Employment by
education level 27
2.3.8.  Beveridge
curve  27
2.3.9.  Temporary
employmen tand self-employment 27
2.3.10.          Number
of collective agreements and workers covered   29
2.3.11.          Nominal
compensation per employee and the minimum wage  29
LIST OF Boxes
1.1.     Economic surveillance process 6
Between May 2011 and June 2014, Portugal
benefited from financial assistance in support of an economic adjustment
programme which also covered the surveillance of imbalances and monitoring of
corrective measures. Portugal is still affected by
very high private and government debt, vulnerability of the financial sector
due to weak bank profitability and an ongoing deterioration of asset quality,
limited access of corporations to credit, high levels of unemployment and
bottlenecks in network industries, services, regulated professions and public
administration. These weaknesses constitute risks for economic growth and
financial stability, thus requiring decisive policy actions. 
This Country Report assesses Portugal's
economy against the background of the Commission's Annual Growth Survey, which
recommends three main pillars for the EU's economic and social policy in 2015:
investment, structural reforms, and fiscal responsibility. In line with the
Investment Plan for Europe, it also explores ways to maximise the impact of
public resources and unlock private investment. Finally, it assesses Portugal
in the light of the findings of the 2015 Alert Mechanism Report, in which the
Commission found it useful to further examine the
existence of macroeconomic imbalances or their unwinding. To this end, this
Country Report also provides an in-depth review (IDR) of Portugal's economy in
line with the scope of the surveillance under the Macroeconomic Imbalances
Procedure.
The main findings from the IDR analysis as
regards imbalances and macroeconomic risks are: 
·       Portugal tackled thoroughly its external imbalances but, starting
from deep-seated external weaknesses, the rebalancing is still ongoing. The traditionally high structural current account deficit has been
closed, exports increased, helped also by improved efficiency and product
quality, and the tradables sector gained in importance. However, the net
international investment position is still very negative and rebalancing
through sustained current account surpluses will not only take time but
requires stronger economic growth, higher exports, and more attractiveness for
foreign direct investment. 
·       The high debt of Portuguese firms still weighs on firms' performance
and impedes new investments, one of the key priorities of the new Commission,
while households' indebtedness declined markedly.
Deteriorating growth prospects and changing attitudes towards risk have
prompted non-financial corporations to adjust their balance sheets, although to
a lesser extent than households.. The high corporate debt ratio represents also
a concern for banks’ balance sheets and Portugal's wider financial stability.
·       General government debt has reached very high levels, also by
bringing off-budget operations on record. While the
increasing path in gross public debt is expected to reverse in the short term,
government debt dynamics remain vulnerable to adverse shocks and impose a high
interest burden on public finances. 
·       The economic crisis has led to a sharp decline in employment. Although the labour market situation has recently improved,
unemployment remains high and the labour market segmented. However, the economy
experienced a substantial real wage adjustment in recent years, and Portugal's
real effective exchange rate trends are conducive to falling unemployment and
the necessary further external rebalancing. Yet there is a risk that
unemployment stabilises at high levels in a low growth environment. 
The Country Report also analyses other macroeconomic
and structural issues, and the main findings are:
·       Portugal is advancing reforms of the fiscal system. This applies for strengthening the fiscal framework and
implementing new measures to fight tax fraud and evasion and reforms of the
public administration, including at the local and regional level. Initiatives
to improve the operating balance of state-owned enterprises continue and
renegotiations of several Public-Private Partnerships are near conclusion. The
sustainability of state-owned hospitals is being addressed, but their stock of
arrears is still high. 
·       Portugal is making some progress with structural reforms. In the energy sector, excessive rents and the electricity tariff
debt are being addressed. Several infrastructure projects listed in Portugal's
long-term transport plan are progressing. Reforms of product markets, services
and regulated professions are advancing, although not in a comprehensive way.
However, the lack of a systematic approach to monitoring and evaluating reforms
makes it difficult to assess their full impact on the functioning of the
economy. 
Overall, Portugal has made some progress
in addressing the 2014 country-specific recommendations. Decisive measures have been taken to stabilise the financial sector
and to overhaul the corporate insolvency and debt restructuring framework.
Active Labour Market Policies have been strengthened.  The assessment of recent
reforms of collective bargaining is mixed, as not all of them promote the
alignment of wages and productivity at firm level. No progress has been
achieved on strengthening social assistance, including the minimum income scheme.
Education and training have undergone important reforms and implementation is
now crucial to prove their effectiveness in improving students' performance.
Network industries are still facing efficiency and sustainability challenges.
Housing, product and services markets reforms are facing delays, especially the
full implementation of the European Services Directive. While the competition
and regulatory framework is being improved, no progress has been made in
reducing the late payment of commercial debts by the administration. Some
progress has been made to increase transparency in public procurement and the
judiciary.
The country report reveals the policy
challenges stemming from the analysis of macro-economic imbalances: 
·       Low competition in product markets and low responsiveness of wages
to productivity at the firm level impact on the competitiveness of exports and
thus on external imbalances. 
·       Slow restructuring of highly indebted but viable companies and slow
orderly exit of those firms that have no viable operating models keep the
corporate debt levels high.
·       Relying on cyclical effects does not facilitate compliance with the
medium-term budget framework or help to reduce the high public debt level in a
sustainable manner. 
·       Labour market policies and the functioning of the collective
bargaining system influence the risk that unemployment stabilises at its
current high level. 
Other challenges are: 
·       Coverage of social assistance is low.
·       Education and training outcomes are not clearly aligned with the
labour market and links between public research organisations and business are
weak.
·       In the transport sector, the new transport regulatory authority is
not operational yet. Liberalisation measures in ports concessions, railways and
metropolitan public transport are slow, thus not stimulating investment.
After a prolonged recession, the
Portuguese economy started to recover in 2013. Real
GDP has been growing in year-on-year terms since the fourth quarter of 2013,
following eleven consecutive quarters of negative growth. Recently, economic
growth has been driven by accelerating private consumption and investment. The
latest economic sentiment data and confidence indicators suggest that domestic
demand is continuing to recover, with imports growing faster than exports.
Economic expansion is expected to accelerate slightly in the medium term as a
result of gradually improving financing conditions and external demand.
 Graph 1.1:     Real GDP growth and its components 
 Source: European Commission 
Inflation is projected to rise
moderately in the medium term. As measured by the
Harmonised Index of Consumer Prices (HICP), it fell to -0.2% in 2014, mainly as
a result of sharp fall in energy prices. Positive figures are expected by the
second half of 2015 as wages rise and oil prices stabilise. However, high
unemployment levels, subdued domestic demand and low oil prices are expected to
contain inflationary pressures in the near future. 
The labour market situation has been
improving since the spring of 2013. In the first
three quarters of 2014, employment growth averaged 2% year-on-year, thereby
outpacing GDP growth. However, the decline in unemployment has recently come to
a halt and the unemployment rate has stabilised since October 2014 with the
employment reduction. Looking ahead, job creation is set to slow down and
employment growth is expected to become more aligned with GDP growth.  
Poverty indicators are traditionally
very high in Portugal compared to the EU average and have deteriorated further
in the wake of the financial and economic crisis.
The number of people threatened by poverty or social exclusion rose by 220,000
between 2007 and 2013. This represents an increase to 27.4% of the total Portuguese
population in 2013 (see Graph 1.2). The gap between Portugal and the rest of
the euro area (23%) has thus widened. Low-work-intensity households and
households with children have been particularly badly affected by poverty and
social exclusion.
 Graph 1.2:     Poverty indicators in Portugal 
 (1) AROPE: People at-risk-of poverty or social exclusion, i.e. individuals who are at-risk-of poverty and/or suffering from severe material deprivation and/or living in household with zero or very low work intensity. (2) AROP: At-risk-of poverty rate, i.e. share of people with an equivalised disposable income below 60% of the national equivalised median income. (3) Severe material deprivation: Share of people who experience at least 4 out of 9 type of deprivations: people cannot afford to i) pay their rent or utility bills, ii) heat their home adequately warm, iii) cope with unexpected expenses, iv) eat meat, fish, or a protein equivalent every second day, v) take a week's of holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour TV, or ix) have a telephone. Source: European Commission 
Poor labour market performance has been
a key factor in the increase in poverty. The
proportion of low work intensity households rose by 5.9 pps between 2008 and
2013. In the same period the number of jobless poor (at risk of poverty and
living in low work intensity household) went up by almost 50%. The disparity
between the top and bottom 20% of the income distribution grew bigger in 2013
and the Gini coefficient remains above 34%, compared to a EU28-average level of
30.5% in 2013. The 7.6 pps. increase in the poverty gap([1]) between 2008 and 2013 was the second largest in the EU after
Greece and the poverty gap now stands at 31.2%. 
Fiscal consolidation continued in 2014,
while the accumulation of arrears has been halted and the stock of arrears
reduced. The general government deficit reached an
estimated 4.6% of GDP at the end of 2014 (3.6% of GDP without one-offs), down
from 4.9% of GDP in 2013 (5.2% of GDP without one-offs). Risks to the
projection relate to cash-accrual adjustments and to the one-off operation
related to Novo Banco. The arrears strategy has halted the accumulation of new
arrears and begun to reduce the outstanding stock (by about 0.3% of GDP over
2014). According to the Commission's winter forecast, the plans underpinning
the 2015 budget are not sufficient to reach the deficit target, revised by the
government to 2.7% of GDP, but would instead lead to a deficit of 3.2% of GDP.
Under the no-policy-change assumption, the deficit is forecast to stand at 2.8%
of GDP by 2016. Risks around the projections relate to macroeconomic
developments, continued efficiency gains in revenue collection, budget-neutral
implementation of the envisaged tax reforms, and possible spending slippages.
The consolidation effort has been
slackening since the end of the economic adjustment programme. In 2014, the Constitutional Court overturned key provisions on
public wage and pension cuts in the initial 2014 budget and the budgetary plans
for 2015. There were no measures of similar quality and scale to compensate for
the resultant shortfalls, which have been offset mainly by additional revenue
from the economic recovery. Thus, the scale of the discretionary measures
underpinning the recent budgetary strategy has been substantially reduced over
time and the projected improvements in headline deficit derive mainly from the
ongoing cyclical recovery. The structural balance is forecast to decline by
0.1% of GDP over 2014-2016, with a procyclical loosening of the fiscal stance
of around 0.6% of GDP in 2015. The current budgetary strategy is hence
considered to be less sustainable than the one in place at the end of the
Programme. Given the high level of public debt and financing needs,
significantly more ambitious reforms - especially on the expenditure side -
will be needed to comply with the medium-term budget framework.
The gross debt-to-GDP ratio is forecast
to have reached about 129% of GDP by the end of 2014 and to fall to 125% of GDP
in 2015. Higher deposits and the depreciation of
the euro are the main reasons for the recent upward revisions in the projected
debt stock at the end of 2014, while the net debt is estimated to have reached
121% of GDP at the end of 2014 (lower than previously anticipated). The
downward path expected from 2015 should be supported by debt-reducing
operations, the projected economic recovery and primary budget surpluses if
fiscal discipline is maintained.
After Portugal joined the European
Monetary Union, competitiveness was undermined by rapidly rising nominal unit
labour costs and deep-seated structural problems in the product and labour
markets. As a consequence of persistent current
account deficits, Portugal accumulated a high external debt, which was mirrored
domestically in the rising indebtedness of both the private and the public
sectors. Portugal started to address these imbalances when the financial and economic crisis broke out in 2008. Gradual
deleveraging in the private sector and some rebalancing of production from the
non-tradable to the tradable sector have since helped to improve external
sustainability and contain macro-financial risks. After its peak in 2013,
unemployment has been reduced but remains at high levels. 
Portugal's deep-seated structural
problems have set potential growth on a downward trajectory since the late
1990s. This was aggravated by an inefficient
allocation of resources, as investment was mainly channelled to the
non-tradable sectors. During the 2000s, potential growth showed a downward
trend mainly due to negative growth contributions of labour supply and
investment, while the growth contribution of total factor productivity (TFP)
has been fairly stable. Between 2009 and 2013, strong increases in unemployment
and a slump in investment activity accelerated the decline in potential growth.
In the medium term, potential growth is expected to be supported by a recovery
in investment and further improvements of the labour market (Graph 1.3).
 Graph 1.3:     Contributions to potential growth in 2003-19 
 Source: European Commission 
However, potential growth is not
projected to resume the growth rates it experienced before the economic and
financial crisis. The main impediments to a further
acceleration of potential output are ongoing deleveraging pressures in the
corporate sector (holding back investment), an unfavourable demographic outlook
and persistently high unemployment (dampening labour supply), as well as the
workforce's low average skill levels combined with outstanding inefficiencies
in product and labour markets (dragging on TFP growth). Structural rigidities
keep the potential growth rate from returning to around 2%, which would be
necessary to ensure public debt sustainability.
 Box 1.1: Economic surveillance process The Commission’s Annual Growth Survey, adopted in November 2014, started the 2015 European Semester, proposing that the EU pursue an integrated approach to economic policy built around three main pillars: boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation. The Annual Growth Survey also presented the process of streamlining the European Semester to increase the effectiveness of economic policy coordination at the EU level through greater accountability and by encouraging greater ownership by all actors. In line with streamlining efforts this Country Report includes an In-Depth Review — as per Article 5 of Regulation no. 1176/2011 — to determine whether macroeconomic imbalances still exist, as announced in the Commission’s Alert Mechanism Report published on November 2014. This Country Report includes an assessment of progress towards the implementation of the 2014 Country-Specific Recommendations adopted by the Council in July 2014. The Country-Specific Recommendations for Portugal concerned public finances, labour market and social policies, the financial sector and access to finance, network industries, housing, product and services markets, the modernisation of public administration and the evaluation of structural reforms. 
 Table 1.1:       Key economic, financial and social indicators for Portugal 
 (1) Domestic banking groups and stand-alone banks. (2) Domestic banking groups and stand-alone banks, foreign-controlled (EU and non-EU) subsidiaries and branches. (3) Real effective exchange rate. (*) Indicates BPM5 and/or ESA95 Source: European Commission, 2015 winter forecast; ECB 
 Table 1.2:       The MIP scoreboard for Portugal 
 Flags: b: break in time series. e: estimated. Note: Figures highlighted are the ones falling outside the threshold established by EC Alert Mechanism Report. For REER and ULC, the first threshold concerns Euro Area Member States. (1) Figures in italic are according to the old standards (ESA95/BPM5). (2) Export market shares data: the total world export is based on the 5th edition of the Balance of Payments Manual (BPM5). Source: European Commission 
Portugal's Net International Investment
Position (NIIP) remains very negative, notwithstanding the recent substantial
current account adjustment.([2]) The NIIP deteriorated sharply in the first decade after the
introduction of the euro, but its decline slowed down after 2010, reaching
about -115% of GDP in 2014 (Graph 2.1.1). A high level of net external debt
makes the economy vulnerable to reversals of capital flows or sudden hiatuses.
To improve the NIIP in the long term, persistent and sizeable current account
surpluses are needed. The problem is aggravated by the fact that past current
account deficits fuelled inefficient spending on private consumption and investment
in construction and property, rather than increasing the productive capital
stock, which would have improved the economy's ability to repay foreign debt.
Indeed, low investment efficiency appears to be a particular problem in
Portugal as its 'incremental capital-output ratio' (ICOR)([3]) is relatively high, pointing to low investment productivity (Table
2.1.1).([4]) 
 Graph 2.1.1:   Breakdown of Portugal's Net International Investment Position (NIIP) 
 Source: European Commission 
 Table 2.1.1:     ICOR (5-year average growth) in selected euro area countries 
 Source: European Commission 
Low investment efficiency may be the
consequence of Portugal's lost attractiveness as an investment location. Since the mid-1990s, other investment, mostly through banks, has
been the most important source of current account financing, fuelling the
credit booms which preceded the economic and financial crisis (Graph 2.1.2). At
the same time, inward FDI dried up, partly as a result of Asia and Eastern
Europe's emergence as competitors for FDI, and partly because of home-made
problems such as rigid labour and product markets and a difficult business
environment. The recent pick-up in the inflow of FDI is related to
privatisation. Portfolio investment became increasingly important in financing
the current account between 2007 and 2009 reflecting to some extent a hunt for
yield.
 Graph 2.1.2:   Current account financing 
 Source: European Commission 
Sustained sizeable current account
surpluses would be required in order to halve the very negative NIIP within ten
years. The  Commission estimates that Portugal
would need to run average current account surpluses of around 2.5% of GDP over the next decade to halve the negative
NIIP (currently about -115% of GDP) by 2024. Average current account surpluses
of around 0.5% of GDP would reduce the NIIP to -80% of GDP by 2024 (Graph
2.1.3). However, Portugal's external debt position is sensitive to
macroeconomic shocks. For instance, a simultaneous 1 pp. permanent drop in the
increase of real GDP and the GDP deflator, combined with a fall in the trade
balance of 2 pps of GDP, would stop the decline in the negative NIIP from
falling further. Conversely, a positive growth, inflation and trade balance
shock of similar size would lead to a substantial improvement in the NIIP to
around -47% of GDP by 2024.
 Graph 2.1.3:   NIIP sensitivity to macroeconomic shocks 
 Source: European Commission 
The sustainability of Portugal's
external position also depends on the structure of its financing. The composition of the NIIP has changed significantly since 2004
with the share of other investment now clearly predominant (Table 2.1.2).([5]) This shift from portfolio investment to debt in financing the NIIP
increases external vulnerabilities.([6]) NIIP financing through FDI, which can be viewed as the most
sustainable option, as it not only allows risk sharing with foreign investors
but also brings technology and entrepreneurial spirit to the economy, has improved
recently as a result of the privatisation process.
 Table 2.1.2:     Structure of the NIIP 
 Source: European Commission 
Portugal had a substantial current
account deficit for many years which started to reverse with the onset of the
economic and financial crisis. Starting from a
deficit of around 12% of GDP in 2008, the current account is expected to have
posted a surplus for the second consecutive year, at around 1% of GDP in 2014
(Graph 2.1.4).([7]) The positive
trajectory of the current account has been mainly due to the remarkable
improvements in the trade balance, reflecting both import compression due to
weak domestic demand and improved external competitiveness. This contrasts with
the persistently negative primary income balance, which is linked to the past
strong increase in net external debt and includes interest payments linked to
portfolio and other investments. The deficit in the primary income balance will
be a drag on the current account balance for some time to come. However, owing
to a reversal in migration flows and additional support from family members
abroad in times of crises, remittances from Portuguese citizens working abroad
have risen significantly in recent years (reaching 1.6% of GDP in 2013),
thereby contributing to a substantial increase in the balance of transfers.
Traditionally positive, the balance of capital transfers, mainly from the EU,
is also likely to remain stable in the coming years. The improvement in the
current account is reflected in Portugal's net external lending position, which
turned positive in 2013 as a result of the gradual deleveraging in the
household and non-financial corporations sectors and the fiscal consolidation
leading to reduced general government deficits (Graph 2.1.5).
 Graph 2.1.4:   External position and its components 
 Source: European Commission 
 Graph 2.1.5:   Net lending/ borrowing by sector 
 Source: European Commission 
The adjustment of the current account
has been largely structural. Despite the import
compression during the recession, cyclical drivers played a limited role in the
current account adjustment between 2010 and 2013 (Graph 2.1.6), accounting for only about 18% of the 10 pps. of GDP total increase in the
current account balance (Graph 2.1.7).([8]) Structural fiscal consolidation is estimated to have contributed
about 10% to the current account rebalancing in 2010-13, while the fall in
private sector debt, the slump in construction activity and the slowdown in
private sector borrowing each contributed around 5% to the total adjustment of
the current account.
 Graph 2.1.6:   Portugal's headline and structural current account balance 
 Source: European Commission 
 Graph 2.1.7:   Breakdown of Portugal's current account into cyclical and structural components 
 Source: European Commission 
Despite the substantial structural
improvement of the current account, Portugal's external position remains
vulnerable. In particular, the highly negative net foreign asset position
has become a major drag on the
current account, in itself implying a structural deficit of around 3.5% of GDP.

A robust export performance contributed
to the external rebalancing of the Portuguese economy. Export growth was subdued in the 2000s. Since 2008, however, this
trend has been reversed by significant improvements in external
competitiveness, and exports' share in GDP rose from 27% in 2009 to around 40%
in 2013 (see Graph 2.1.8). This is still a relatively low level compared with
other small and open economies in the euro area. It is a reminder that the
rebalancing towards export-led growth needs to continue in order to sustain the
improvement in the current account.([9]) Export growth was driven mainly by exports of goods, which
increased their share in GDP from 19% in 2009 to 29% in 2013. In the same
period, Portugal's export market share increased as
annual export growth outpaced growth in foreign demand for Portuguese exports
products by 3.7% on average, In National Accounts terms. 
 Graph 2.1.8:   Imports and exports of goods and services as a proportion of GDP 
 Source: European Commission 
Imports have been compressed by falling
domestic demand during the economic and financial crisis. Falling expenditure on investment and consumption weighed on import
demand during the economic downturn and compensated for the additional boost to
imports provided by the recovery in exports. As a result, the import share in
GDP remained fairly constant at around 38% between 2010 and 2013 (Graph 2.1.8).
However, this share is set to increase as the economic recovery is increasingly
led by domestic demand (see Section 1).
The recent upswing in exports was
supported by favourable trends in nominal unit labour costs (ULCs)
developments. In the first decade after the
introduction of the euro, nominal unit labour costs rose faster than in other
euro area countries, due to faster increases in nominal compensation per
employee and lower growth rates in productivity. This was particularly the case
in the first years of the euro. The upward trend in ULCs in the tradable sector
reversed in 2010 and ULCs fell by an average of almost 7% by the end of 2013,
owing to productivity increases coming along with job cuts (Graph 2.1.9).
However, the fall in ULCs in the tradable sector seems to have reversed
recently, highlighting the challenge of generating employment while containing
price pressures in the tradable sector. The correction of nominal ULCs in the
non-tradable sector did not get under way until 2011, and this adjustment was
dampened at the end of 2013 by a reinstatement of a part of the wages in the
public sector that had been cut to support fiscal consolidation.
 Graph 2.1.9:   Nominal ULC trends in tradable and non-tradable sectors 
 Source: European Commission 
Successful rebalancing of the economy from
the non-tradable sector to the tradable sector also requires flexibility in
product markets. Further product market reforms are
necessary to tackle structural weaknesses and rigidities in the non-tradable
sector, especially the network industries. This would cut production costs for exporters and boost competitiveness in
general. Relative prices rose until the onset of the economic crisis but
adjusted markedly in 2010-12 (Graph 2.1.10) as structural reforms dampened the rising prices of non-tradables; another
even more significant factor was the shift in the export product mix to higher
value-added exports with higher price tags. Both trends are conducive to the
further rebalancing towards the tradable sector.
 Graph 2.1.10: Relative prices of tradables and non-tradables in Portugal 
 Source: European Commission 
In addition, the real effective exchange
rate has adjusted significantly in recent years.
The stronger adjustment occurred in the ULC-based real effective exchange rate
(Graph 2.1.11). That adjustment was particularly marked
between 2010 and 2012, when unit labour costs fell with productivity growing
faster than the nominal wage. The significant drop in employment contributed to
productivity growth, while nominal wage rigidities limited the extent of
nominal wage adjustment, which might only have occurred at the margin, i.e. for
new contracts. 
 Graph 2.1.11: Real effective exchange rates in relation to the EA-17 
 Source: European Commission 
 Graph 2.1.12: Average growth rate in profit margins (2010-13) 
 Source: European Commission 
The adjustment in both real wages and
unit labour costs is consistent with the challenges of unemployment absorption
and external rebalancing. The adjustment achieved
needs to be preserved in view of the internal and external equilibria.([10]) In addition, wage differentiation may facilitate the reallocation
of resources towards tradable sectors, contributing to productivity growth and
higher export capacity. Graph 2.1.11 shows that the sharp downward adjustment
in ULC-based real effective exchange rate (REER)   was accompanied by a more
muted decline in the REER based on the GDP deflator. This is consistent with
the adjustment of real wages to the labour market slack, but may indicate a
more limited responsiveness of price-cost margins to weak economic conditions.
Nonetheless, developments in unit labour costs alone could play an important
role in boosting the export sector as long as profit margins are higher in the
tradable sectors, so that resources are shifted to tradable industries. Graph
2.1.12 shows that profit margins in the tradable sectors grew somewhat faster
than in the non-tradable sectors between 2010 and 2013.
 Graph 2.1.13: PULCs, quality and prices of Portuguese exports, by comparison with the EU28 average 
 Source: European Commission, Joint Research Centre, IPTS institute 
Portugal has improved its capacity to
compete in export markets by improving in production efficiency and product
quality. Relative physical unit labour costs (PULCs)([11]) in Portugal fluctuated at about 90% of the EU average until 2011,
but have since dropped markedly, highlighting the competitiveness gains
resulting from lower production costs (Graph 2.1.13). This fall, however, has
not been matched by a similar fall in relative export prices, which suggests
that Portuguese exporters have managed to extract higher profit margins from
their exports, possibly by 'upgrading' their export product portfolio. Indeed,
there is evidence of continued improvement in the quality of Portuguese exports
by comparison with the EU average. This is captured by the 'Quality Index'
(Graph 2.1.13), which measures the capacity of exporting companies to charge
higher prices. However, while the quality of Portuguese exports has
outperformed the rest of the EU in some specific
sectors, Portugal's export sector still specialises in products with lower
average prices and quality.
 Graph 2.1.14: Geographical and sectoral breakdown of export market share growth in Portugal 
 Source: European Commission 
Both product and geographical
specialisation have contributed to the increase in export market shares since
2010. The unfavourable geographical specialisation
and product mix of Portugal's exports led to falling export market shares
between 2008 and 2010. However, this trend has since reversed and export market
shares are now being boosted as Portugal's exporters make inroads into faster
growing export markets with export products that are in greater demand. Due to
the recovery in the main European trading partners,([12]) the initial geographical specialisation has recently boosted
Portugal's export market shares (Graph 2.1.14).
Despite recent improvements in the
structure of its exports, Portuguese firms are still specialised in relatively
cheap and low-quality products. Since 2006, the
share of capital goods in Portuguese exports has only increased by 1.4 pps,
while the share of consumer goods fell by 1.3 pps. Capital goods are generally
high value added products which compete through good quality. In 2013, the
share of capital goods in Portuguese exports was still markedly lower than
their share in aggregate EU28 exports (see Table 2.1.3). Portugal's higher
proportion of consumer goods in total exports signals the need to strengthen
higher value-added production.
 Table 2.1.3:     Structure of goods exports by broad economic category (in %) 
 Source: European Commission 
Portuguese exports of services have
remained broadly constant as a proportion of worldwide service exports over the
last decade. Growing exports of transport services
were broadly offset by the decline in tourism and other services (Table 2.1.4). Transport sector services are
characterised as high value added and their expansion may reflect significant
productivity gains. Overall, exports of services have been growing in
importance in the Portuguese economy. Portuguese exports of services accounted
for 27% of total exports of goods and services between 2007 and 2013 - 3 pps.
higher than between 2000 and 2006. The ratio of Portuguese exports of services
to GDP also rose from an average of 6.5% (2000-06) to 8.9% between 2007 and
2013. Despite this increase, Portuguese exports of services as a proportion of
GDP are still lower than in other small and open European countries, such as
Belgium, Ireland or the Netherlands.
 Table 2.1.4:     World market shares for services (in %) 
 Source: European Commission 
So far, Portugal has made significant
progress to date in adjusting its external and internal imbalances. However, despite major improvements, the
adjustment is not complete and large external liabilities still represent a
major source of vulnerabilities. The NIIP position has worsened further, as
recent improvements in the current account are not sufficient to counterbalance
the negative changes in the NIIP. In the past,
substantial improvements in cost developments, particularly in the non-tradable
sector, along with the improved quality of exported
goods, have boosted competitiveness and exporters' capacity to participate
successfully in international markets. Further improvements of cost
developments will have to take place in a low inflation environment and may be
hampered by existent inefficiencies and rigidities in the domestic market.
Wide-ranging reforms in product and services markets could help ensure that
capital is allocated efficiently to where it is most productive and would
produce higher productivity and long-term growth.
 
Portugal has undergone a severe
recession characterised by corporate financial distress, a struggling banking
sector and accelerating public debt. In the
post-Programme context, the high financial leverage of Portuguese firms
continues to be a critical factor constraining firms' performance and impeding
economic recovery. This section first looks at trends in household and, in
particular, non-financial corporate sector indebtedness and at key policy measures
taken to improve the financial situation of non-financial corporations (NFCs).
The second part of this section highlights public debt sustainability issues.  
Deleveraging
dynamics in the private sector
Portugal has made significant progress
with reforming its economy in the context of a deep economic crisis. Three years of determinated efforts have enabled the country to
successfully exit the economic adjustment programme in June 2014. Undeniably,
Portugal has come a long way in improving its private sector imbalances, one of
the Programme's key areas. In recent years, the households' savings rate rose
considerably to about 10% of disposable income (from 7% in 2008), while
indebtedness fell from nearly 95% of GDP in 2009 to just over 80% of GDP in the
final quarter of 2014. This allowed the highly leveraged financial sector to
significantly lower its loans-to-deposit ratio which resulted from a higher stock of deposits and decreasing
stock of loans. The household sector adjustment is even more remarkable as it
occurred in the midst of a pan-European financial crisis and against the
background of declining disposable income. Nonetheless, the difficult financial
situation of Portuguese households is reflected in the large number of
insolvent borrowers, which started to rise as far as back in 2008. Between
January and November 2014, the number of individuals filing for bankruptcy
reached 12,979, over three times as much as in 2010, according to Instituto Informador Comercial (IIC).
However, 2014 marks a 2% improvement when compared with the same period in
2013. According to Banco de Portugal, the ratio of non-performing household
loans continues to rise, reaching 4.9% in the third quarter of 2014 (up by 0.2
pp. quarter-on-quarter), and around 660,000(individuals – representing about
15% of all individual borrowers – had overdue loans.  
 Graph 2.2.1:   Household indebtedness as a percentage of GDP 
 Source: European Commission 
 Graph 2.2.2:   Private NFC indebtedness as a percentage of GDP 
 (1) Excluding trade finance and intercompany lending. Source: European Commission 
Deteriorating growth prospects and
changing attitudes to risk have prompted non-financial corporations to adjust
their balance sheets, although to a lesser extent than households. The very high indebtedness of non-financial corporations, both by
historical standards and compared to other euro area economies, remains a major
vulnerability of the Portuguese economy. There is a vast literature confirming
the importance of liquidity, financial structure and financial distress on firm
performance. Recent empirical studies, often based on experience from previous
economic and financial crises, suggest that corporate debt levels above 90% of
GDP([13]) can act as
a major drag on economic growth, as higher indebted companies are less likely
to invest and hire. Portuguese private corporate debt stood at 149.2%([14]) of GDP in September 2014, which is some 18 pps. lower than the
peak level of 167.4% in 2012. Accounting for the total NFC sector debt
including public corporations and all inter-company lending, the stock of debt
amounts to a staggering 172% the GDP, which is close to double the above
mentioned threshold. For a significant set of corporations the balance sheet
adjustment has been rather disappointing on average, and Portugal's corporate
sector remains one of the most indebted in Europe. This high level of corporate
indebtedness hinders corporate profitability and has a negative impact on the
investments required to stimulate growth in the tradable sector.([15]) Moreover, the high debt ratio of Portuguese non-financial
corporations represents a major concern for the banks’ balance sheets and the
country's wider financial stability, through the large number of non-performing
loans (NPLs) and corporate bankruptcies.
Pursuing orderly deleveraging in the
various highly indebted sectors of the Portuguese economy, while at the same
time stimulating economic growth, remains a key challenge. The banking sector plays a crucial role in this context by
reallocating of resources to the most productive and innovative segments of the
economy. A selective approach to corporate credit is essential to ensure the
long-term viability and competitiveness of private sector firms. The internal
rebalancing of the Portuguese economy depends on striking the right balance
between deleveraging on the one hand and reallocating resources on the other.
This is further complicated by a low-growth and low-inflation environment in
Portugal, representing a challenge to the operations and profitability of
Portuguese firms and to the domestic banking sector, which is highly exposed to
low interest rates through a large stock of legacy mortgages.([16])
 Graph 2.2.3:   Breakdown by sector, total debt-to-GDP ratios 
 Source: Banco de Portugal 
 Table 2.2.1:     Debt-to-equity and return on equity ratios, broken down by sector 
 Source: INE 
The leverage picture is quite mixed
across different economic sectors. Measuring
indebtedness against the level of economic activity conceals the major
differences that exist between sectors. Breaking figures down by sectors and
key corporate ratios – such as debt-to-equity and return-on-equity (ROE) – is
far more telling from an analytical perspective. The optimal
debt-to-equity ratio may be considered to be about 1, i.e. when a firm's
liabilities are equal to its equity, but the ratio is very industry-specific as
it depends on the proportion of current and non-current assets. The optimal
ratio also varies according to the size and ownership
structure of the business. Nevertheless, for most
companies the maximum acceptable debt-to-equity ratio is 1.5-2. In Portugal, the NFC debt-to-equity ratio, defined
as total liabilities over total equity, was recorded as
2.82 in 2008, falling to 2.51 by the end of 2013. For SMEs this ratio reached
almost 3 in 2008 and declined to 2.48 in 2013. Looking at individual sectors,
the largest financial imbalances in the economy at the end of 2013 were to be
found in the construction and real estate sector, with a debt-to-equity ratio
of 3.1, accommodation and food services (3.48), and transport and storage
(12.11). The corporate sector's difficult economic situation is also
highlighted by the return on equity (ROE). The ROE (Table 2.2.1) for the
construction and real estate sector (-4% in 2013) has remained negative since
2008. Accommodation and food services fared even worse with a ROE of -20.1% in
2013. Generally, close to half of private-sector firms have been burning their
equity or posting negative profits over the past 5 years.
 Table 2.2.2:     Importance of SMEs in the Portuguese economy 
 Source: EC Enterprise and Industry, 2014 Small Business Act for Europe (SBA), Portugal factsheet 
SMEs have traditionally played a much
bigger role in the Portuguese economy than in other EU Member States and are
the most vulnerable companies. According to the
2014 Small Business Act for Europe (SBA), in 2013, they accounted for 79% of jobs and 66% of value added, both
of which are considerably higher proportions than the EU average. Moreover, 95%
of firms in Portugal - about three percentage points above the EU average - are
microenterprises. They also generate more than 40 % of private sector jobs.
Most SMEs are active in services, manufacturing and trade, and in all of these
areas they provide the majority of jobs.
Given their size, SMEs (especially
microenterprises) are heavily dependent on the domestic banking sector. This makes them vulnerable to the sharp tightening in credit
conditions that has occurred in recent years, as banks have experienced funding
pressures and rapidly deleveraged their balance sheets. Typically,
microenterprises have far less power than larger firms to negotiate debt
rescheduling with banks. The high refinancing needs linked to short-term
liquidity for financing current operations have only aggravated
microenterprises' liquidity constraints. As most Portuguese SMEs entered the
crisis already highly leveraged (with debt-to-equity ratios approaching 3, or
financial debt amounting to 12 times EBITDA,([17]) rolling over debt became difficult as profits fell. High leverage
has forced Portuguese SMEs to dismiss staff and engage in rapid deleveraging.
Not surprisingly, between 2008 and 2013 Portuguese SMEs shed over 350,000 jobs,
a 13.5% cut in their total workforce in 2008. Value-added and the total number
of SMEs also declined, the latter to a much lesser extent. Most of deleveraging
by NFCs after the peak in June 2011 (some EUR 18 billion in nominal terms) was
attributable to SMEs. Their share in the debt-to-GDP ratio dropped from 94.5%
in 2012 to 84.8% in the third quarter of 2014. In general, over 20% (Table
2.2.3) of Portuguese firms were finding it difficult in 2013 to cover their
debt service expense from EBITDA and were encountering some solvency problems.
This suggests that there will be more deleveraging and, probably, insolvencies
in future.
 Table 2.2.3:     Corporate solvency risk heat map 
 Source: European Commission, ORBIS Database 
 Graph 2.2.4:   Distribution of corporate solvency risk by sector 
 Source: European Commission, ORBIS Database 
Debt can pose systemic risk to the
banking sector. Recent years have been marked by
the worst financial crisis that has ever faced the Portuguese banking sector.
Portuguese banks' funding structure and business model based on a reliance on
wholesale funding, an oversized branch network and generous financing of
mortgages and non-tradable sector activities, are currently undergoing major
changes. Most banks have sought to boost market confidence by reducing their loans-to-deposits
leverage and raising capital, despite the low profitability environment. But
many credit institutions remain fragile on the asset side, as non-performing
loans (NPLs) have continued to rise until recently. Portuguese banks' exposure
to NFCs has been a major challenge since the onset of the economic crisis. The
non-performing loan ratio in this segment reached 18.7% by the third quarter of
2014, with some banks facing corporate NPL at well above 20%.  About 90% of
credit to the NFC sector is concentrated in 10% of the firms with bank credit.([18]) Among these firms, overdue credit as a proportion of the total
shot up to nearly one third by mid-2014. This mainly reflects the position of
the over-leveraged construction sector, in which around half the debtors with
big bank exposures have credit overdue.
While coverage ratios (loan loss
provisions as a percentage of NPLs) in the NFC segment have improved (currently
standing at about 60%), the capacity of the banking sector to withstand losses
from a wave of NPLs appears to be limited without additional capital
injections. In a worst-case scenario where all NPLs
were fully written off and without taking the collateral into account, banks’
capital would be cut by about a third. Nonetheless, the
results of the Comprehensive Assessment of Portugal's three biggest banks,([19]) which the European Central Bank finalised in published in autumn
2014, suggest that the top-three Portuguese banks covered in the test are
adequately capitalised under the baseline assumptions.([20]) Even though, at the current juncture,
risks to the banking sector's capital position appear to be contained,
financial stability could be strengthened by adopting a more pro-active
approach to cleaning up specific large and risky corporate loan exposures.
Granting credit to viable projects and not compromising non-financial sector
deleveraging remains a key challenge for banks. This means that the criteria
for granting and monitoring credit must be appropriate to the current
situation, so that new credit is used efficiently to finance profitable and
productive projects. Furthermore, in a scenario of prolonged low interest
rates, it remains paramount to ensure that incentives are not created to delay
recognition of losses by the banks. 
The policy response has been appropriate
although its impact has been slow. Most Portuguese
NFCs are chronically short of capital, and the country in general would benefit
greatly from more foreign direct investment. Action has been taken at various
levels to address the multiple and challenging aspects of the complex high
corporate indebtedness issue. It is imperative to accelerate restructuring by
corporations that, although indebted, are still viable. Equally authorities
must enable firms that have no viable operating models to make an orderly exit
from the market. 
Portugal has taken major steps to
overhaul its corporate insolvency and restructuring framework, giving it a
stronger focus on the recovery of firms rather than their liquidation. A new debt restructuring mechanism inspired by US Chapter 11
provisions has been added to the bankruptcy code to allow fast-track
restructuring before an insolvency proceeding begins. One of its features is
the possibility for courts to enforce out-of-court agreements between the
debtor and a majority of creditors. For micro and small firms, a specific
out-of-court mechanism (SIREVE) has introduced more rapid mediation by a new
public mediator agency with electronic platforms to reduce paperwork and
guarantees to companies and creditors during the negotiation phase. SIREVE and
PER (special revitalisation process) have both been recently revamped; SIREVE
becoming leaner and now has a financial assessment system, financial filters
and improved seniority rules for new money and investors. The number of
businesses starting insolvency proceedings fell by 7.6% in 2013, the first drop
in five years, one reason for this being the efficient use of PER that covered
985 companies, according to 2014 Small Business Act for
Europe (SBA). In general, the authorities have stepped
up efforts as regards corporate debt rescheduling since the launch in May 2014
of the Strategic Plan for Corporate Debt Restructuring. Changes to the
Commercial Code now promote the issuance of quasi-equity/hybrid instruments
such as non-voting shares, while also allowing for easier and fast-track
procedures to issue company bonds, thus promoting restructuring rather than
company liquidation. Portugal also continues to offer relatively good
conditions (in comparison with its European peers) for entrepreneurs who,
despite past failure, wish to start a new business. Changing social attitudes
towards insolvency are reducing the stigma of business failure.([21]) Banco de Portugal is promoting debt rescheduling among NFCs and
has continued to introduce tighter supervision of credit institutions. In addition to cross-cutting inspection programmes, Banco de
Portugal has recently implemented an 'Early Warning System' for supervisory
purposes, to identify firms (including SMEs) that are very likely to default
because their debts are too high. This may indirectly promote early corporate
debt rescheduling. Moreover, Banco de Portugal has issued a set of recommendations on procedures to identify and manage
credit at risk (Special Assessment Programme). This will encourage more
conservative impairment standards across the banking sector. All these
initiatives have had a positive impact on reducing financial difficulties and
indebtedness in the corporate sector. Debt rescheduling tools have been made
available to highly leveraged corporations and incentives to capitalise have
been set up, but an arduous task still lies ahead. According to the IMF,
episodes of high growth in corporate indebtedness are generally followed by
deleveraging processes, in which approximately two thirds([22]) of the original increase in debt is subsequently reduced. Applying
this percentage to Portuguese firms, debt reduction would still have to shave
off some 40 percentage points of private corporations' indebtedness.
Public debt sustainability
General government debt has reached very
high levels. In the context of the global financial
crisis and subsequent recession, the very high fiscal deficits, the
reclassification of off-balance items and entities in the general government
perimeter and the stabilisation interventions in the financial system have put
general government debt on a steeply rising trend. From 2010 to 2013 the gross
debt-to-GDP ratio increased by over 30 pps and it may have approached 129% of
GDP by the end of 2014, one of the highest public debt levels in the euro area.
Higher deposits and the depreciation of the euro are the main reasons for
recent upward revisions in the projected gross debt stock at the end of 2014.
The level of net debt reached an estimated 121% of GDP at the end of 2014,
slightly lower than previously anticipated, as a result of recent cash
management operations. The primary balance, which records surpluses since 2013,
reached an estimated 0.4% of GDP in 2014 and should be above 1.5% of GDP in
2015 and 2016, moderating future financing needs.
While the the gross public debt-to-GDP
ratio is expected to reverse its current rising trend in the short term and
public debt is considered sustainable under plausible scenarios, debt dynamics
are vulnerable to adverse shocks. Supported by the
projected economic recovery, expected primary surpluses and debt-reducing
operations, the debt-to-GDP ratio is expected to fall to 125% of GDP in 2015
and to continue falling gradually after that. Furthermore,
model simulations of debt sustainability have been carried out that incorporate
the scenario of the 2015 winter forecast until 2016 and other technical
assumptions for the medium term (i.e. structural primary fiscal balance at 2.1%
of GDP surplus as of 2018; nominal interest rates at around 4-4.5% of GDP;
nominal GDP growth rate of 3-3.5%; ageing costs in line with the Commission's
2012 Ageing Report). For the baseline scenario, the results point to a gradual
fall in the debt ratio in the long term. Nevertheless, given the very high
starting point, the debt ratio is projected to remain above its pre-crisis
level (66% of GDP in 2008) for many years to come, not falling below 100% of
GDP before 2030. 
Sensitivity analysis suggests that the
declining debt-to-GDP trajectory is sensitive to financial market volatility
and vulnerable to adverse economic developments.
Overall, the debt sustainability analysis reveals that the debt reduction path
of the baseline is robust across a number of reasonable scenarios, but
plausible shocks could considerably worsen the dynamics of Portugal's public
debt (see graphs 2.2.5 and 2.2.6). Shortfalls in nominal growth, sharp interest
rate rises or slackening fiscal efforts could put the public debt ratio out of
control. An unsustainable debt trajectory would potentially have a very adverse
impact on Portugal's economic stability and could have negative outward
spillovers via the sovereign risk channel.
 Graph 2.2.5:   Macroeconomic risk - growth and interest rates 
 Source: European Commission 
 Graph 2.2.6:   Fiscal consolidation and ageing costs 
 Source: European Commission 
The very high level of government debt
places a heavy burden on public finances. High
public debt implies less fiscal room for manoeuvre in the event of adverse
shocks, with potential detrimental implications for growth and jobs. This
highlights the need for continued stabilisation of public finances.
Budgetary discipline and fiscal and
growth-enhancing structural reforms are needed to safeguard fiscal
sustainability and achieve a significant reduction in the debt path. The current very high debt ratio implies a
significant adjustment burden, requiring the conditions underpinning falling
debt to be steadfastly maintained in the coming decades. In particular,
sustainability is attainable only if budgetary discipline is maintained over
time, with continued progress towards the medium-term budgetary objective.
Achieving the deficit targets and lowering the primary expenditure-to-GDP ratio
in the medium term would generate fiscal space for growth-enhancing public
expenditure and further tax reforms. In addition to making progress with fiscal
adjustment, it will be essential to strengthen fiscal responsibility through
stronger control over government expenditure and to improve revenue collection,
if budget promises are to be kept. In particular, fiscal structural reforms
designed to strengthen the framework for public financial management and
continued reforms of the revenue administration must be firmly implemented in
the years that lie ahead (see further details under Sections 3.1.2 and 3.1.1).
Finally, a sound path to reduction depends on medium and long-term economic
growth. This means perseverance with structural reforms will be essential
(further details under Section 3). 
The Portuguese labour market is showing
signs of recovery as of 2013, following the deep-rooted adjustment in recent
years. Recent wage developments have been conducive
to the adjustment process and the overall labour market performance is starting
to benefit from reforms implemented during the adjustment programme. Nonetheless,
several challenges remain, the most important being the prompt absorption of
the large pool of unemployed, which weighs heavily on both economic growth and
the social situation. For economic growth to be sustainable and with a view to
strengthening the export sector and contributing to external rebalancing, a
substantial part of the unemployment needs to be absorbed by the tradable
sector. A well-functioning labour market is key to achieve this goal, while
contributing to lift Portugal's growth potential. 
 Graph 2.3.1:   Employment and unemployment 
 Source: European Commission 
The economic crisis has had a drastic
impact on employment. Total employment fell by
about 730,000 (14.5%) between the peak in the second quarter of 2008 and the
trough in the first quarter of 2013 (Graph 2.3.1). Unemployment rose by 525,000
in this period. The construction sector alone lost 244,000 jobs, almost halving
employment in the sector. Manufacturing also lost about 180,000 jobs (about
20%); however, employment in the sector has risen in the recent quarters. A key
facet of Portugal's economic recovery will be absorbing of the large pool of
unemployed people. 
The labour market situation has recently
improved, but unemployment rates remain high, while employment rates are far
below their 2008 peak. The employment rate among
20-64 years old - traditionally high in Portugal - has fallen significantly
since the start of the economic crisis, from 73.1% in 2008 to 65.6% in 2013
(Graph 2.3.2). However, it has been rising since the first
quarter of 2013 and, according to the most recent data, stood at 68.3% in the
third quarter of 2014 (72.3% for men and 64.6% for women). 
 Graph 2.3.2:   Employment and unemployment rates and long-term unemployment 
 Source: European Commission 
After a steep rise between 2008 and
2013, the unemployment rate has been falling since the second quarter of 2013. However, it was still high at 13.7% in the third quarter of 2014
(13% for men and 14.5% for women). Long-term unemployment as a proportion of
total unemployment stands at over 60% (Graph 2.3.2). It has risen significantly
in the last year, reflecting a fall in the separation rate and a slow pick-up
in the hiring rate. The large proportion of people unemployed for more than one
year, in turn, can create difficulties with absorbing unemployment (i.e.
"hysteresis" effects).([23]) 
Youth unemployment is particularly high,
but is on a decreasing trend. The youth
unemployment rate stood at 32.2% in the third quarter of 2014 (34.5% among
women). Nonetheless, joblessness is declining, down from a peak of 42.5% in the
first quarter of 2013. The percentage of under-30s currently not in education,
training and employment (NEETs) has been rising since 2009, reaching 16.7% in
2013.
 Graph 2.3.3:   Unemployment rate, actual and predicted based on Okun's law 
 Source: European Commission 
Over the past year, the fall in
unemployment outpaced GDP growth. The drop in the unemployment rate has been much more
pronounced than expected on the basis of the historical relationship between
unemployment and GDP (Graph 2.3.3). This suggests that specific factors might
have played a role, such as the decline in active population([24]) and the effect of the labour market reforms, including the
substantial adjustment in real wages that has occurred
in recent years and the stepping up of active labour market policies.([25]) 
The economy has undergone a substantial
real wage adjustment over the past few years. Real
wages had already been growing below productivity before the economic crisis
(Graph 2.3.4). This trend became more pronounced after 2010, owing to a
moderation in nominal wages growth and a sustained growth in labour
productivity.
 Graph 2.3.4:   Real compensation per employee and labour productivity 
 Source: European Commission 
In addition, nominal unit labour costs
adjusted significantly. Also in this case, the
adjustment was more relevant after the crisis, after a period when unit labour
costs in Portugal grew significantly faster than the euro area average (Graph
2.3.5). During the period 2010-2012, unit labour costs declined (see also
Section 3.1).
 Graph 2.3.5:   Nominal unit labour costs 
 Source: European Commission 
The adjustment carried out so far has
increased the share of employment in tradable sectors. Between 2010 and 2013, employment growth in the tradable sector
outpaced that in the non-tradable sector; indeed, the difference was the
highest among the euro area countries (Graph 2.3.6). However, these data also
reflect the fact that more jobs have been lost in the non-tradable sector. Once
employment has recovered, there will be a need to assess whether labour has
been actually reallocated across sectors (see also Section 3.1).
The skills composition of the labour
force weighs on productivity and on the reallocation of labour to higher
value-added sectors. In 2008, low-skilled workers
accounted for some 68% of total employment, compared with a euro area average
of just 27% (Graph 2.3.7). The proportion of highly skilled workers has since
increased, owing to rising workforce education levels and higher unemployment
rates among low-skilled workers. In 2014, low-skilled workers accounted for 50%
of the total (against a euro area average of about 21%), while the share of
highly skilled workers in the labour force rose to 25% (7 percentage points
below the average in the euro area). The share of middle-skilled workers
remains relatively low. That underlines the importance of quality and
attractiveness of vocational and educational training as well as the prevention
of early school leaving. In this regard, the recent increase in numbers of
young people not in employment, education or training (NEETs) is particularly
worrying. The skills composition of the Portuguese labour market is a factor
explaining the very wide gap in value added per worker between Portugal and the
rest of the euro area.([26])
 Graph 2.3.6:   Gap between employment growth in the tradable and in the non-tradable sectors: 2010-13 
 (1) The tradable sector comprises: i) agriculture, forestry and fishing; ii) industry (excluding construction); iii) wholesale and retail trade, transport, accommodation and food service activities. The non-tradable sector comprises: i) construction; ii) financial and insurance activities; iii) real estate activities; iv) professional, scientific and technical activities; v) administrative and support activities; vi) public administration, defence, education, human health and social work activities; vii) arts, entertainment and recreation; other service activities; activities of household and extra-territorial organizations and bodies. Source: European Commission 
Job-matching has become less efficient
during the crisis, but shows signs of improvement.
The estimated Beveridge curve (Graph 2.3.8), plotting the unemployment rate
against the job vacancy rate, has shifted outwards since 2008. In particular it
showed a significant leap after the end of 2011, indicating less efficiency in
job-matching (both unemployment and the number of job vacancies rose), along
with a general deterioration of labour market indicators. However, the
situation seems to have been improving since the end of 2013, as the
unemployment rate has started to decline alongside a roughly constant job
vacancy rate.
 Graph 2.3.7:   Employment by education level 
 (1) ISCED 0_2: less than primary and lower secondary education; ISCED 3_4: upper secondary and post-secondary non-tertiary education; ISCED 5_8: tertiary education. Source: European Commission 
 Graph 2.3.8:   Beveridge curve 
 (1) Job vacancy rate = total number of vacancies/ (total number of vacancies + total employment). Source: European Commission 
The proportion of employees on temporary
contracts remains high, although a substantial share of new contracts are being
concluded on a permanent basis. Legislation enacted
during the Programme aimed at aligning incentives for employers to hire on
open-ended contracts for permanent posts. The share of fixed-term contracts has
dropped during the crisis, as they are the first to be hit by economic
downturns. More recently, with rising employment, the share of people on
temporary contracts has risen again (Graph 2.3.9). Nonetheless, a very
significant fraction of employment is being created on permanent contracts,
which could be evidence of an improved balance in employment protection between
permanent and fixed-term contracts. An effective reduction in labour market
segmentation could contribute to enhance labour productivity. In addition, the
share of self-employed people without employees in total employment fell,
possibly indicating lower use of self-employment contracts in situations where
work is being done by employees.
 Graph 2.3.9:   Temporary employmen tand self-employment 
 (1) Self-employment as a proportion of total employment. Source: European Commission 
The labour market needs to support the
economy's adjustment challenges. Substantial
adjustment needs remain: (i) the employment rate is a long way below the 2008
peak and there is a risk of unemployment stabilising at high levels, given the low growth and the increase in labour
market mismatch, reducing potential growth and entailing a negative impact in
terms of poverty and social exclusion; (ii) the external adjustment carried out
so far needs to be sustained, given the sizeable level of negative net foreign
assets. 
Portugal implemented a comprehensive
labour market reform agenda during the economic adjustment programme. To encourage job creation in open-ended
contracts and address duality, severance payments for permanent contracts have
been reduced, while the definition of fair dismissals has been eased. Working
time has become more flexible to contain employment
fluctuations over the cycle, accommodate differences in work patterns across
sectors and firms better, and enhance firms’ competitiveness. To facilitate wage adjustment, measures have been taken to
increase scope for bargaining at firm level. Unemployment insurance benefits
have been revised to increase incentives for a rapid return to work, while
guaranteeing a sufficient level of protection and easing eligibility. Active
labour market policies have been streamlined to make them more effective in
supporting job creation, strengthening activation and providing more effective
training opportunities. The remainder of this chapter provides an overview of
the most recent measures.
Three measures have been taken recently
in the area of collective bargaining, but not all of them favour the alignment
of wages and productivity at firm level. Law
55/2014, adopted on 25 August 2014, encompasses two measures. First, it reduces
the survival of collective agreements that have expired and not been renewed;
second, it introduces the possibility of temporarily suspending sectoral
collective agreements at firm level. The reduction of the survival period of
expired collective agreements, by curbing automatisms in their renewal, has the
potential to induce greater dynamism in collective bargaining.([27]) The possibility of temporarily suspending sectoral collective
agreements might make contractual adjustment more flexible at firm-level, but
it requires the intervention of the original signatories of the sectoral
agreement, which is likely to limit its effective application.([28]) A third recent additional legislative measure alters the criterion
for extending([29]) collective
agreements. According to this measure, a decision to extend an agreement no
longer has to take into account the representativeness of signatories in the
sector, as was required since 2012. A less stringent criterion based on the
composition of signing employers' associations has been introduced instead.([30]) The consequent potential renewed generalisation of extensions of collective
agreements is likely to hinder efficient wage adjustment at firm level. 
During the crisis collective bargaining
has declined substantially. The number of sectoral
collective agreements fell from 172 in 2008 to 36 in 2012, while the number of
extensions fell from 137 to 12 in the same period. Firm-level collective
agreements also declined considerably (Graph 2.3.10). The number of employees
covered by collective agreements fell from almost 1.9 million in 2008 to some 225,000 in 2014. These
developments show the difficulty social partners were facing in reaching
agreements during the crisis.
However, collective bargaining is slowly picking up. Differentiation of wages,
including a broader scope for adjusting wages at firm level, is necessary in
order to facilitate job creation in the tradable sectors and to avoid a
situation where the burden of adjustment falls entirely on new contracts. In
this regard, scarce diffusion of work councils poses a limit to the take-up of
firm-level bargaining.([31])
 Graph 2.3.10: Number of collective agreements and workers covered 
 Source: MSESS - DG for Employment and Industerial Relations 
Having been frozen during the economic
adjustment programme, minimum wages were raised in October 2014.
During the programme, the minimum wage would have been raised only if justified
by economic and labour market developments. This implied its freeze during the
programme. The Council of Ministers decided in September 2014, following an
agreement with social partners, and effective from October 2014 until December
2015, to increase the monthly minimum wage (paid 14 times per year) from EUR
485 to EUR 505 (i.e. by 4.1%) and to cut employers' social security
contribution (TSU) for workers already receiving the minimum wage by 0.75pp. to
23%.([32]) Despite the
freeze in recent years, the minimum wage has risen significantly faster than
the average wage in nominal terms since 2008 (by 18.5% vs. 3.5% between 2008 and
2014, see Graph 2.3.11). Consequently, it became more binding, with the
proportion of workers covered by the minimum wage rising from 5% in 2005 to
12.9% in 2014. That proportion reaches 21% in the accommodation and food
service activities sector and in the other service activities sector. The
expected immediate effects of the latest increase on employment and
competitiveness are relatively small. A continued monitoring of the possible
effects on the employment prospects of the most vulnerable groups is envisaged.([33]) At the same time, this measure contributes to preserving labour incomes for those at the bottom of the wage scale.
 Graph 2.3.11: Nominal compensation per employee and the minimum wage 
 Source: European Commission 
The reform of the employment protection
legislation implemented during the economic adjustment programme eased the
definition of dismissal based on redundancy and unsuitability and lowered severance
payments. Severance payments for open-ended
contracts were cut from 30 to 12 days per year of work. For temporary
contracts, severance payments were cut from 36 (or 24 for contracts longer than
6 months) to 18 days during the first three years of the contract. One of the
objectives of this reform was to align incentives for employers to hire on an
open-ended contract for permanent posts, reducing segmentation. Continued
monitoring of the impact of this reform is needed to analyse both job creation
involving permanent contracts and transition rates from temporary to permanent
contracts. Aggregate data show a decline in the share of temporary employment
during the crisis, explained by more intensive job shedding among temporary
contracts. More recently, the proportion of temporary contracts is rising with
the growth in employment. As the macro data hide labour market flows, detailed
analysis is needed, based on data on employment creation by type of contract. 
During the economic adjustment
programme, Active Labour Market Policies (ALMPs) were streamlined to make them
more effective in supporting job creation, strengthen activation and offer more
effective training opportunities. Over the same
period, the Public Employment Services (PES) were also reformed to improve
their efficiency. In January 2015, Portugal adopted a new framework law for
employment policy,([34]) which aims
at further rationalising the set of ALMPs and the role of PES, as well as at
establishing the principle of systematic evaluation of the different ALMP
programmes in the Standing Committee for Social Dialogue. Portugal continues to
make progress in this area. Overall, the total number
of unemployed people covered by employment measures([35]) rose from 141,335 in 2013 to 205,247 in 2014, while numbers of
participants in training measures, according to IEFP data, went up from about
466,547 to 524,821 in the same period.  ALMPs seem to have played a key role in reducing unemployment over
the past year with a 25% increase in the number of placements, from 84,402 in
2013 to 105,518 in 2014. However, the measures need
careful monitoring to ensure that they are effective. In particular, transition
rates from employment subsidies into regular employment need to be analysed, as
already happens with traineeship measures. The same applies to the
effectiveness of the training programmes in making the groups concerned more
employable.
Despite improvement throughout the
Public Employment Services (PES) reform, the PES caseload remains very heavy. Efficiency can be improved further by taking a bolder approach to
the digitalisation of services, including automated matching, and by further
specialising staff to deal with more difficult cases. In addition, the PES's
role - in profiling, providing appropriate job counselling and job search
assistance, and enforcing sanctions where job search requirements have not been
met - needs ongoing monitoring. The diploma([36]) which frames the cooperation between public and private employment
services has been approved and there are plans for two pilot projects involving
of partnership between the public and private employment services.  
Measures have been taken to fight the
upsurge of youth unemployment and NEETs, notably through the implementation of
the Youth Guarantee (YG). Implementation of the
Youth Guarantee started on 1st January 2014 and progress is underway. Between
March and December 2014, 67,317 people aged under 30 and not in employment,
education or training (NEET) took part in measures classed as a 'Youth Guarantee
quality offer' once they had been registered by the Public Employment Services
for a maximum of four months. These included, on the basis of IEFP data, work
placements, vocational training and traineeships.
Portugal is making substantial efforts
to put the Youth Guarantee into practice([37]) and involve all relevant governmental and non-governmental
partners in implementing it. The PES – Youth
Guarantee Coordinator Entity – is conducting awareness-raising campaigns to
involve partners  better able to reach out to young people not in employment,
education or training, namely NGOs and social institutions. An IT Youth
Guarantee platform has been set up to enable monitoring of the young people
benefitting from the programme. In spite of these progresses, there are
substantial challenges to be addressed, including the PES' capacity as Youth
Guarantee coordinator to engage the Youth Guarantee network's various partners,
and the need to reach all non-registered NEETs. Additionally, there is little
evidence that future skills needs are identified before youth guarantee offers
are designed. 
 
Taxation
The tax policies adopted recently imply
a slight shift towards a more growth-friendly tax structure. Under the 2015 budget, the corporate income tax (CIT) reform
initiated in 2014 is to be continued by cutting the standard rate by a further
2 percentage points. The CIT reform was designed to promote competitiveness and
investment, to help make Portuguese companies more international and to
simplify the complex CIT system. It also addressed the high debt-bias in
corporate taxation by strengthening the limits for the deductibility of net financial
expenses. The burden-reducing reform of  personal income tax introduced in 2015
is designed to address demographic issues (e.g. by introducing a family
quotient system and reforming tax credits for family expenses), simplify the
taxation system (e.g. by introducing simplified pre-filled tax statements) and
help entrepreneurs (e.g. by reducing their taxable income during the first two
years of activity, to help start-ups). In parallel, the green taxation reform
is designed to help promote a more sustainable economic development model. New
green taxation measures include raising the rate of tax on the purchase of
polluting vehicles, depending on CO2 emissions, and introducing a tax on
plastic bags. The additional revenue raised by this green taxation reform is to
be allocated to reduce the tax burden on labour (i.e. assumed
revenue-neutrality of the above-described personal income tax and the green
taxation reforms). Higher revenue is also expected in 2015 from recurrent
property taxation (from the non-continuation of a safeguard clause that impeded
too sharp increases in the property tax bill), while the transaction tax has
not yet been phased out. Some excise duties and indirect taxes (e.g. on
tobacco) will also rise under the 2015 budget. Overall, these reforms mark some
progress towards the goal of improving the growth-friendliness of the tax
structure. The scope for further shifting taxation towards less distortionary
taxes should be explored on the basis of a comprehensive evaluation of recent
tax reforms. The yields from a relatively growth-friendly but little used
source, such as inheritance, estate and gift taxes, could be improved.
The action taken by Portugal in recent
years to broaden its VAT base and improve VAT efficiency needs to be assessed. The country has reduced the scope of application of reduced and
intermediate rates.([38]) Although
the VAT policy gap was estimated at 52% for 2009-2012 (the arithmetic average
for the EU is 41.4%,([39]) the
indicator may not yet reflect the base-broadening measures introduced in 2011
and 2012. Instead of introducing further legal changes, Portugal could consider
comprehensively assessing whether efforts to broaden the VAT base have actually
made the VAT system more efficient.
The full budgetary and economic impact
of recent tax reforms will need to be monitored. In
particular, close attention should be paid to ensuring that the personal income
tax and green taxation reforms are implemented budget-neutrally. The impact of
these reforms on the progressive nature of the tax system must also be closely
monitored, as there is a risk that high- income households may benefit more
than low- income households. The impact of the green taxation reform on the
Portuguese economy should also be closely monitored, to make sure that
competitiveness and investments are not adversely affected. The impact of the
CIT reform on productive investment and on the high level of corporate debt (as
detailed in section 3) is a key issue for the Portuguese economy. In 2014, the
gap between the effective marginal tax rate on investment financed with equity
and debt in Portugal was still one of the highest in the EU.([40]) The CIT reform included a number of measures designed to boost
investment, such as revamping the R&D tax credit (SIFIDE II) and extending
the carry-forward period for tax losses from 5 to 12 years. Portugal lags
behind the EU average as regards gross domestic expenditure on R&D (1.4% of
GDP in 2013) and it had a foreign direct investment inflow of only 1.4% of GDP
in 2013. Effectiveness of the patent box system also needs to be monitored.
Portugal has continued to improve tax
compliance and combat tax evasion by making  the tax administration more
efficient. Over the past few years, the country has
been investing in tax-related IT systems, such as the e-invoice system, which
has proven successful in improving tax compliance and yielded significant
additional revenue. According to available statistics, around 9 billion
invoices were registered and communicated to the tax administration in
2013-2014, with a 10% increase in the last year over 2013. The resources
allocated to auditing have also been increased with the recruitment of 1,000
additional tax auditors. The 2015 budget announced further measures to increase
efficiency in curbing tax fraud and evasion, including the reinforcement of the
Large Taxpayer Office and the recently adopted 2015-2017 Strategic Plan to
combat tax and customs fraud and evasion. Some of these measures mainly imply
further exploiting the potential of e-invoicing and the unified monthly
returns, by strengthening existing procedures and better cross-checking all
relevant information. Other recent measures (e.g. the mandatory communication
of inventories for taxpayers with turnover above EUR 100,000) can also be
fairly effective, especially those targeting sectors where fraud is likely to
be high, such as the rental market. Overall, given the high reliance of the
revenue projections underpinning the budget on yields from anti-fraud measures,
implementing these measures effectively is a top priority. For the plan to be
effective in yielding additional revenue, critical capacity must be developed
within the tax administration to handle the vast amount of relevant data
gathered through the e-invoice system.
The revenue administration needs to
pursue its reform agenda, and more must be done to improve taxpayer compliance. Organisational reforms are under way in the tax administration,
including the planned integration of local tax offices into the Aproximar programme, the progress made
by the Risk Management Unit, and the recently created Taxpayers' Services
Department. Yet there is ample scope for further reforms to modernise the
revenue administration and further improve taxpayer compliance. These include
more efforts to combat tax fraud in the housing market, improving
information-sharing arrangements with financial institutions, and strengthening
the anti-money-laundering framework. Interaction between the judicial system
and tax collection also remains an issue, with a high level of litigation,
whereas a high level of undisputed tax debt as a percentage of the annual net
revenue collection remains. The special task forces of judges assigned to
tribunals dealing with high value cases are no longer in place. Although some
efforts have been made to increase the availability of IT systems, and
thresholds for tax appeals have been raised so as to reduce the burden on the
tax courts, the present situation suggests that a more thoroughgoing reform of
litigation procedures for taxation is needed.
Fiscal framework
The reform of the Budget Framework Law
and other Public Financial Management reforms will further improve the domestic
fiscal framework. The proposed Budget Framework Law
reform, based on an analysis of outstanding fragilities in the system and
recommendations by relevant stakeholders, is designed to: improve the formulation of numerical fiscal rules; streamline budget
appropriations; reduce budget fragmentation, which remains high; make the
various budget units more accountable; improve the budgetary cycle calendar and
strengthen the medium-term budgetary framework, which includes defining more
stringent expenditure ceilings. Technical complexities
have delayed the reform process by comparison with initial plans, and the
legislation is now expected to be put in place in the first quarter of 2015.
Once the legislative process is completed, the focus should move to
implementation under the strong leadership of the Ministry of Finance. Another
major improvement in the fiscal framework is the recently concluded reform of
the Commitment Control Law (CCL), which should further strengthen discipline
and budgetary control and prevent any new accumulation of arrears.
Efforts should continue to improve The
accounting and reporting framework needs further improvement. The October 2014 IMF Fiscal Transparency Evaluation([41]) identified further challenges to be met to achieve advanced levels
of fiscal transparency and suggested that Public Financial Management be
strengthened further. The Ministry of Finance and the standard-setting body
are  preparing a new public-sector accounting framework based on internationally accepted standards.
Following public consultation, the plan is to submit the project for Government
approval and draft the implementation manual in 2015, while practical
implementation will extend into 2017.
Challenges related to structural-fiscal
policies in the fields of pensions and the health system 
The budgetary impact of population ageing
poses a challenge to Portugal's medium and long-term sustainability, especially
as regards pensions and healthcare policies. A challenge in these areas was
identified in the 2014 European Semester (CSR1).
Pensions
Portugal's recent pension reforms have
made the system more financially sustainable, but the impact on future pension
adequacy is less certain. According to ESSPROS
data, pension expenditure rose from 11.3% of GDP in 2007 to 13.9% of GDP in
2012 (EU-28 in 2012: 12.8%). The recent reform measures were designed to cut
pension system costs in the short, medium and long term. Measures to improve
the financial situation of the pension system include suspending pension
indexation (except for the lowest benefits); introducing disincentives to early
retirement; cutting the highest pensions; raising the pensionable age from 65
to 66 for both sexes, and linking future increases to life expectancy at age
65. Updated calculations of ageing costs based on the reform measures and the
latest available demographic projections will be made available in the first
half of 2015.
Lower pensions have been protected
comparatively well during the crisis. Between 2011
and 2012 (last data available from the Institute for
Social Security), the average annual old-age pension
(all schemes included) fell from EUR 4,907 to EUR 4,748. There are
substantial differences between the average pension entitlements of (i) men and
women; and (ii) pensioners under the general statutory scheme and the scheme
for public employees (CGA, now closed).([42]) Overall, however, the economic crisis has affected pensioners'
income less than that of the rest of the population. The median relative income
ratio rose from 92% to 94% between 2012 and 2013 (EU-28: 93% in 2013), showing
convergence between the median equivalised disposable income of the over-65s
and that of persons up to the age of 64.([43]) Further, recent trends in poverty and
social exclusion among the elderly suggest that the incomes of the most
disadvantaged have been relatively well protected during the crisis (see Section
3.2). 
In the medium and long run, the adequacy
of pensions will crucially depend on longer and less interrupted working lives
for both men and women, given that the Portuguese population is set to age
substantially over the next few decades. Based on
Eurostat data, the old-age dependency ratio is expected
to increase from 29.4% in 2013 to 63.9% in 2060 (EU-28 in 2060: 50.2%), posing
a threat to both the adequacy and the sustainability of the pension system. The labour market participation of older workers, however, has
tended to fall over the past decade. The employment rate of men aged 55 to 64
fell from 62.1% in 2003 to 58.5% in 2008, and a low 53.2% in 2013 (EU-28 in
2013: 57.5%), while the employment rate of older women has stagnated slightly
above 40% (EU-28 in 2013: 43.3%). Currently, only 4.1% of 55-64-year-olds are
engaged in life-long learning. There are hiring incentives in place that target
unemployed people over the age of 45.
The rise in the legal retirement age and
the link with changing life expectancy in the future is expected to improve the
medium-term sustainability of the pension system. The fact that the mechanism is automatic makes the pension system
more transparent and may also signal to individuals and
to the social partners that retirement practices must change. If pensions are
to cover pensioners' needs, people will need to retire later in the future.([44]) This is why the recent pension reforms
must be accompanied by measures to incentivise longer working lives,  support
the employability of older workers, and  allow for a more gradual transition
from work to retirement.
Health system
The Portuguese health system faces a
fiscal sustainability challenge as, according to
the 2012 Ageing Report, public health expenditure is projected to rise more
than the EU average.([45]) In 2012,
health expenditure accounted for 9.5% of Portugal's GDP. Portugal has one of
the lowest shares of public expenditure in total health spending (63%, compared
with the EU average of 73%). Out-of-pocket payments as a share of total health
expenditure increased between 2007 and 2012 by 4.5 pp (the highest increase in
the EU). The fact that some 14% of the population have no family doctor
continues to pose problems. Waiting times for selected types of planned surgery
lengthened between 2010 and 2013, reversing the previous trend and confirming
the recent rise in unmet medical needs. This indicates that there is a need to
step up efforts to maintain existing levels of access to healthcare.
Health system reforms in Portugal
continue to produce results. Hospital-sector
reforms and cost optimisation have contributed in recent years to savings in
the healthcare sector. Arrears in the hospital sector remain a challenge,
although they have been significantly and steadily reduced since 2012. Total
debt was reduced by EUR 150 million in 2014, and EUR 250 million are still
available from the equity injections in state-owned hospitals earmarked to
further reduce the stock of arrears during 2015 (around EUR 560 million, in
December 2014). The National Health Service budgets for 2015 and 2016 will
probably include significant increases in staff costs, as there are plans to
reverse public officials' wage cuts. However, the 2015 budget is still set to
cut overall health spending, showing a continuing commitment to reform. 
Progress has been made on hospital
reform and other healthcare-related reforms. A
report on establishing reference centres has been adopted, and the Portuguese
authorities are in the process of reclassifying hospitals, an important task.
Centralised procurement continues to save the National Health Service money.
Generics eligible for public reimbursement in the outpatient sector have
continued to expand their market share, resulting in less spending on
medicines. Similarly, spending on pharmaceuticals can be cut by negotiating
pharmaceuticals prices with the industry. The new role of Family Nurse should
improve prevention and health promotion in Primary Care
Centres. The authorities have also launched initiatives
to increase and incentivise the supply of health professionals in areas where
access to healthcare is particularly problematic. 
Other fiscal-structural policies
Thanks to the restructuring of
operations in state-owned enterprises (SOEs), their operating performance
continued to improve in 2014. A further
EUR 309 million was allocated to state-owned hospitals to halt new arrears,
improve their operating balance and provide additional healthcare services. The
2015 budget provides for state-owned hospitals to reach an operating balance on
their own in 2015. As with transport sector SOEs, the restructuring of
operations that started during the Programme continued throughout 2014. The
adjusted EBITDA is close to positive for the third year in a row. The operating
improvements, mainly stemming from a general rise in commercial revenue,
combined with further personnel cost compressions (despite the Constitutional
Court ruling) have more than offset the drop in public compensation of EUR 50
million (from the 2013 level) or EUR 250 million (from 2010). Downsizing
continued successfully in 2014, with some 3,400 jobs shed by comparison with
2010 levels.
Mergers of several SOEs and urban
passenger transport concessions continued in 2014 and will be concluded this
year. The mergers between the railway (REFER) and
the road (EP) infrastructure operators, and between the water and sewerage
branches of Águas de Portugal are progressing. As regards the latter, the
consultation of the municipalities involved in the merger of 19 companies into
6 was concluded. The legislative process will follow and is expected to be
finished during the first half of the year. The urban transport concessions in
Porto are expected to close in January, bringing about EUR 150 million savings
to the public exchequer during the 10-year length of the contract. Similarly,
the Lisbon services are to be put out to tender at the beginning of February,
just after the public service obligation (PSO) contracts have been finalised.
It is expected that contracts will be awarded by the end of the second quarter
of 2015. The purpose of  the tender is to further cut that part of taxpayers'
costs that relates to public compensation.
Public-private partnership relating to
roads saved more money than expected in 2014.
Savings from renegotiating concessions, lower toll collection costs, fewer
financial rebalances, and more toll revenue resulted in savings of over EUR 370
million in relation to the base case, exceeding the latest Government forecast
by 10%.
Privatisations continue with a view to
freeing additional capital and refocusing SOEs on their core business. Taking advantage of improved financing conditions for the
sovereign, the Government began to refinance bank loans of SOEs inside the
general government and outside it (notably CP, Carris, STCP, Parque Expo,
Empordef and EDIA), as their debt has matured to replace the more expensive
bank loans by cheaper Treasury funds. The Treasury covered EUR 5.7 billion of
SOEs' financing needs in 2014, thereby alleviating their interest burden. To
further strengthen the financial position and refocus several SOEs on their
core business, the plan to privatise some subsidiaries is being pursued,
including EGF, CP Carga, EMEF and Carristur. Given the TAP airline's need for
an equity injection, the Government relaunched a privatisation process after a
failed attempt in 2012. These privatisations are all expected to be concluded
by mid-2015.
Public administration reforms designed
to improve the efficiency and quality of public expenditure have continued, but
more slowly and with a smaller budgetary impact than initially expected. Employment in the public administration is expected to continue
falling, mainly through attrition, but probably at a much slower rate than in
recent years. The termination of fixed-term contracts, the implementation of
the requalification scheme and the termination of contracts by mutual agreement
are contributing much less to reductions in the number of jobs than previously
planned. The introduction of the single wage-scale and the single
supplement-scale in 2015 will make the remuneration system fairer and more
transparent, but is not expected to save any expenditure.
Portugal experienced a sharp increase in
poverty and social exclusion in 2013. The number of
people living at risk of poverty or social exclusion increased by 210,000
between 2012 and 2013, making it more difficult to
reach the national 2020 target. The increase in the
percentage of people at risk of poverty or social exclusion was the highest in
the EU (2.1 p.p. from 25.3% in 2012 to 27.4% in 2013). Severe material
deprivation increased by 2.3 p.p., affecting 10.9% of the population in 2013. The poverty gap for the working age population([46]) stood at 31.2% in 2013, marking the second largest increase in the
EU compared to beginning of the crisis.([47])
The increasing levels of poverty and
social exclusion have been affected by the rising levels of unemployment up to
2013.  The sharp increase in both unemployment and
long-term unemployment translated into worsening poverty indicators. Between
2008 and 2013, the share of low work intensity households increased by 5.9
percentage points (the fourth largest increase in the EU), while the number of
jobless poor (at risk of poverty and living in low work intensity households)
reached 564,000 in 2013.
A weakened social protection system and
policy measures adversely affecting disposable income
had a negative impact on the social situation. The impact of social transfers (excluding pensions) in reducing
poverty decreased by 2.5p.p in 2013 (26.7% in 2013 compared with 29.2% in
2012), suggesting that the inadequate social protection system was unable to
cope with the sudden rise in joblessness and the consequent increase in
poverty. Additionally, some of the recent policy measures had a negative impact
on disposable income. Cuts in non-pension benefits disproportionately affected
the very poor (bottom decile). Policy changes also adversely affected children
under the age of 10.([48]) 
Households with children have been
particularly affected by poverty and social exclusion, also owing to a reduced
impact of family benefits and social transfers.([49]) In 2013, children were at greater risk
of poverty or social exclusion than the rest of the population – 31.6% against
27.4% of the overall population – and Portugal had the largest increase in the
EU. These figures follow a major reduction in childcare benefits, with two
series of cuts implemented respectively in November 2010 and January 2012. Between
October 2010 and August 2014, 591,971 beneficiaries lost access to child
benefits, i.e. one in every three beneficiaries. In total, the state reduced
spending for the support of families with children by 30% between 2010 and
2011.([50])
Older people have been relatively
sheltered from the risk of poverty and social exclusion during the crisis,
although the incidence of severe material deprivation has increased. The proportion of over-65s at risk of poverty and social exclusion
decreased from 27.7% in 2008 to 20.3% in 2013 (EU-28 in 2013: 18.3%). Since
2011, however, the severity of poverty and levels of severe material
deprivation increased slightly in this age-bracket.
While some measures were taken to
protect the most disadvantaged groups,([51]) no key policy changes have been implemented or planned recently to
ensure an adequate coverage of social assistance.
According to the most recent national data, unemployed people not covered by
unemployment protection or by the minimum income scheme (RSI) accounted for
47.9% of all jobless people, on the basis of September 2014 IEFP IP data. The
unemployment benefit coverage rate of the long-term unemployed dropped
significantly between 2010 and 2012 (from 39% to 26%), while slightly rising to
29% in 2013.([52])  Similarly,
the coverage rate for the short-term unemployed went down from 45% in 2010 to
39% in 2012, then increasing to  41% in 2013.([53]) The figures on the Minimum Income Scheme show a steady decrease
since new rules took effect in July 2012. In October 2014([54]) there were approximately 207,000 beneficiaries, meaning that
nearly 131,000 people had lost their benefit entitlement since June 2012 - over
38% of the total.  
Portugal has undertaken a comprehensive
reform of its education system, but effective implementation remains key to
bring positive outcomes. National and international
assessments show that students' performance level is stagnating with a share of
low achievers exceeding the EU average.([55]) The revision of curricula in primary and secondary education and
the definition of new learning outcomes are expected to improve students'
performance in basic skills, such as maths and Portuguese. However, it
disregards several cross-cutting key competences such as learning to learn and
entrepreneurial skills. Increased autonomy for schools and the introduction of
a new funding formula based on schools' performance encourages quality
programmes. In-service training for teachers is being addressed through a new
system of trainings and credits.  However, this critical part of the reform is
jeopardised by the lack of resources, trade union support and social ownership.

Disparities in education performance and
early school leaving (ESL) linked both to the socio- economic and migrant
background of students are high. PISA data show
that equity in education outcomes worsened significantly between 2003 and 2012.
Grade retention is often used as response to low performance, but has shown to
be inefficient and to increase the risk of ESL.  The new education monitoring
tool should help implement preventive actions by identifying students at risk
of school failure. Several initiatives such as the TEIP (programme for schools
in socially vulnerable areas) have proven to be efficient and the 2015 budget
provides for extra support for early childhood education and care which should
help mitigate social disadvantages at an earlier stage. However, difficulties
facing low performers must be targeted and schools must be helped to
effectively develop quality programmes if disparities are to be reduced. 
Recent reforms are designed to upgrade
the vocational education and training system, but making it more attractive is
also a challenge. As part of the strategy to
address early school leaving Portugal has introduced more, and more diverse,
vocational courses in secondary education, such as the new basic vocational
course for the 14-years-olds, which offers new opportunities to students at
risk of retention. To upgrade vocational education and training (VET) and make
it more relevant to the labour market, much more training is now at the work
place and specific indicators have been introduced for monitoring the quality
of apprenticeships. The creation of the Centres for Qualification and
Vocational Education has also helped boost VET enrolment rate. The new
short tertiary education cycle superior technical professional courses
(TeSP) aims at developing close links with regional businesses; 94 courses
are registered covering a total of 2.775 students in 40 different locations.
65% of the existing TeSP focus on business administration, ICT and services.
However, a shortage of funds is holding back implementation. The same applies
to the professional schools of reference, the legal framework for which
was approved in April 2014, but which have not been opened yet. 
While tertiary educational attainment
keeps increasing the employment rate of graduates has decreased significantly
since 2008.([56]) In order to improve the skills synergies between the education
system, the labour market and economic growth policies, the Ministry of
Education is working, together with the OECD and the European Commission, on a National
Skills Strategy. A diagnosis report on how to improve the quality and labour
market relevance of education outcomes is set to be presented during the first
quarter of 2015.
Portugal is making progress toward more
efficient and targeted public expenditure in education. The reorganisation of the public schools network, in tandem with
the new funding formula, if effectively implemented and monitored, should help
make more efficient use of teachers and ultimately make education spending more
efficient, especially if the level of performance is improved. The 2015 budget
foresees a 9.6% reduction of the education spending in primary and secondary
schools compared with the 2014 estimate, mainly by cutting the number of
teachers engaged in non-teaching activities. However, the capacity of the
teaching force to implement effectively new quality programme deserves
attention.
Portugal has made significant progress
in improving its education system but the upgrade of its human capital and
educational outcome remains a challenge to ensure competitiveness and growth
capacity. Early school leaving and disparities in
performance hamper the development of high level skills, and tertiary
attainment remains low([57]) compared
with other EU countries. The shortage of digital skills in the Portuguese
population as a whole and in the work force in particular([58]) is a brake on performance in the country's competitiveness in the
digital economy. Efforts to improve digital literacy and regular internet use
are necessary to promote digital inclusion.  Unemployment rates also show that
there is a need to make education and training more adaptable and responsive to
emerging needs. Education should therefore remain high up on the policy agenda
over the coming years, as a major driver of sustainable economic growth and
productivity.
Reforms have been adopted in order to
improve competitiveness, increase flexibility and improve the business
environment, but further action is needed in a number of areas. A wide range of reform measures have been adopted to alleviate
nominal rigidities, facilitate adjustment, reduce excessive rents and encourage
the reallocation of resources to the tradable sector. Significant measures have
also been taken to cut red tape and make the judicial system more efficient.
However, significant structural weaknesses remain in key areas, including
services and regulated professions, public administration and network
industries (particularly energy and transport). In addition, robust and
systematic monitoring and impact assessment tools are needed to assess the
impact of reforms.
The national competition and regulatory
framework has been improved, but actual implementation must be carefully
monitored. The Competition Authority Decree Law,
published in August 2014, provides the Competition Authority with a new
financing model for 2015 and beyond. This will address the problem of annual
executive orders to provide funding for the Authority on a one-off basis for
each calendar year. This financing model must be carefully monitored, to ensure
that it is appropriate and that the Portuguese Competition Authority performs
its duties effectively. The range of transfers for which the bylaws provide may
not be sufficient to cover a scenario of modest growth in and after, 2016, once
the public service salary cuts are progressively reinstated and bearing in mind
that important new tasks will need to be carried out, including more advocacy. 
The national regulatory authorities' new
framework has not been fully implemented yet. Under
the economic adjustment programme, a new framework law setting out the main
principles underpinning the functioning of the principal national regulatory
authorities (NRAs) and the competition authority was adopted. Following this
adoption, the bylaws of the respective NRAs were amended to reflect the
principles of the new legal framework. The bylaws concerning the Securities
Market Commission (CMVM), the Insurance Regulator (ISP) were published at the
beginning of January 2015, while the Communications Regulator (ANACOM) and the
Civil Aviation Authority (ANAC) were approved by the Council of Ministers at
the end of December 2014 and are now awaiting for presidential promulgation and
publication. The Transport Regulator (AMT) is not fully operational yet,
despite the recommended deadline of the end of September 2014, since amended
provisions, notably as regards directors' cooling-off period, were only
recently published to ensure consistency with the framework legislation.
Reforms of Portuguese services markets
and regulated professions have yet to be completed.
For Portugal, the impact of barrier reductions from the implementation of a
sub-set of services covered by the Services Directive will increase the overall
GDP by 0.8% in line with the  EU 27 average.([59]) Some important pieces of legislation remained unchanged after the
termination of the macroeconomic adjustment programme, limited progress has
been made in aligning the outstanding sector-specific legislation with the
Service Directive and there is no political will to amend legislation on
universities. Laws on construction services and copyright collective management
societies are delayed in Parliament. In addition, limited progress has been
made towards improving access to a number of highly regulated professions. To
this end, a framework law reforming professional services governed by
professional associations was adopted in 2012 under the programme, introducing
rules and principles. This was to be followed by amendments of the statutes and
internal rules of these professional bodies, to bring them into line with the
principles laid down in the framework law. 18 such statutes needed amendment.
None of the 18 bylaws has been approved yet: nine draft bylaws for highly
regulated professions are reportedly finalised but, not yet approved by the
Council of Ministers; the remaining nine draft bylaws are experiencing delays,
mainly due to non-compliance with the framework law for highly regulated
professions and with EU law.
The reform of the licensing regime
continues to progress but with experiencing some delay. Limiting the number of procedures to follow and the time and cost
required to start a business is important to achieve a competitive environment
for firms. The European Commission has estimated the potential impact of changes
in entry costs between 2011 and 2014 on entry dynamics in Portugal on the basis
of its own calculations.  The predicted increase of the entry rate due to the
decrease in the cost to start a new firm would be from 12.4% to 13.1%, whereas
the potential combined effect of the reduction in the number of procedures
needed to start a new business and in the time needed to start exporting could
increase the Portuguese entry rate from 12.4% to 13.6%. Licensing regimes are
being streamlined to establish the overall principle of ex-ante declarations
with ex-post control. The Portuguese authorities have adopted some of the
outstanding decrees on licensing, particularly a new law on commercial
licensing, but a number of them are delayed 
Work is ongoing, although with some
delay, to reduce administrative burden. Authorities
are carrying out inventories of the most burdensome regulations and drafting
roadmaps to tackle them. A first inventory was completed in 2014. Portugal is
to complete a new inventory by March 2015 which will cover sectors not
addressed in the former. Another key measure to reduce administrative burden is
the "one-in, one-out" principle which was adopted in May 2014 but its
effective implementation is yet pending on the approval of the relevant methodology.
An Inter-Ministerial Network for Administrative Modernisation (RIMA), is
expected to play a pivotal role in beefing up the governance framework for
administrative simplification, although its main focus is on the central
administration. 
Access to financing remains costly and
difficult for most SMEs, even though credit conditions have been gradually
improving over the past two years.  This is a
result of the size and organisational features Portuguese SMEs that, similarly
to their European counterparts, are largely dependent on bank funding. All
other funding sources such as capital market financing remain rather an
exception than a general pattern. Moreover, the ongoing deleveraging of the
corporate sector continues and one of its aspects is the strong differences between
companies, which is reflected in the interest rates applied to corporate
lending. These have slightly eased since the end-2012, mainly for loans below
EUR 1 million, but remain elevated (on average at 4.83%in November 2014) when
compared to the Euro area average of 1.83%.([60]).The high lending rates for local SMEs are correlated to
a large extent with the banks’ (still elevated) own financing costs and their
risk perception regarding the outlook for domestic SMEs in general. Nonetheless,
both the ECB lending survey and the Portuguese Bank Lending Survey mention that
fewer Portuguese business owners report a fall in banks’ willingness to lend.([61]) The government is looking for solutions to ease the current
constraints by strengthening existing instruments and fostering the use of
alternative financing mechanisms.([62]) Among others, Portugal is setting up a specialised development
financial institution (DFI) to promote greater efficiency and effectiveness in
the management of financial instruments for supporting SMEs. The DFI is also
expected to address market failures which hamper some SMEs to access funding.
The set of financing tools that the DFI will provide to the local SME segment
will include both debt and equity (or quasi-equity) funding. Despite its formal
establishment, the DFI is not operational yet as there are significant legal
and operational requirements to be settled.  As the DFI was created to manage
the financial instruments supporting SMEs under the ESI
Funds (European Structural Investment Funds),
significant delays in finalising its operations could hinder the deployment of
the ESIF-funded programmes to finance SMEs projects. 
The liquidity of businesses continues to
be aggravated by long delays in payments, in particular by the public sector. No new measures have been taken or commitments made to tackle late
payments by the public sector. The European Commission has initiated an
infringement procedure against Portugal for failure to fully transpose the Late
Payment Directive, excluding the healthcare sector. 
Portugal lags
behind the EU average as regards the involvement of business in science and
innovation, in terms of public-private cooperation in R&D activities and in
the transfer and commercialisation of knowledge.([63]) It has stepped up investment in
research and innovation investments over the past decade with a remarkable
average annual real growth rate of 7% between 2000 and 2007. Despite this, its
performance is still below the EU average.([64])  Portugal's overall R&D intensity fell from 1.58% in 2009 to
1.36% in 2013. Public R&D intensity diminished by an average annual growth
of 0.4% from 2008 to 2013, reaching 0.59% in 2013. Business R&D intensity
has also fallen since 2009; by 2013 it was only about half of the EU average in
2013 (Portugal: 0.65%, EU: 1.29%). 
Policy incentives for cooperation
between public bodies conducting research and businesses remain weak. Given the weak and scattered policy incentives for the cooperation
between public research organisations and businesses, and the lack of adequate
innovation-friendly framework conditions for business investment in research
and innovation, Portugal has been unable to overcome its companies'  structural
orientation towards activities that are not knowledge-intensive. The Innovation
Agency (AdI) that promotes cooperation projects between research and industry
has been given a stronger role and its governance streamlined, which is
expected to improve productivity and competitiveness. A new scheme for PhD
studentships in industry has been established by the Foundation for Science and
Technology (FCT) to leverage productivity and competitiveness. However, there
is still a need to effectively implement stronger incentives for public-private
cooperation, more effective mechanisms for knowledge transfer and efficient
investment in research and innovation. To help Portugal make the transition to a more knowledge-intensive
economy, the following are needed: an investment-friendly environment for
business investment in research and innovation, to avoid a situation in which
researchers face different conditions in the public and the private sector, closer links between higher education and the business sector and
further improvements in the allocation of funding on the basis of performance criteria. It is also very important to increase the broadband
take-up, by tackling the reasons underlying low rates of broadband subscription
and internet use. Portugal lags behind significantly in fixed and mobile
broadband take-up and in internet use.([65])  The Digital Agenda Strategy for Portugal, approved in 2012, does
not specify improving the actual broadband take-up as one of its goals nor does
it mention the affordability of internet. 
Reforms have been carried out to
modernise the Portuguese justice system, but close monitoring is needed. The new Judicial Organization Act was implemented in 2014. It aims
to improve the efficiency and professionalism of court management with
significant benefits in the organisation and management of the judiciary,
performance accountability and service provision. The new code of civil
procedure, which became effective in September 2013, introduced significant
changes to expedite the resolution of cases. However,
according to the 2015 EU Justice Scoreboard, proceedings in civil and
commercial cases continue to be lengthy (386 days). The number of enforcement
cases is still falling slightly whilst disposition time remains long (1045 days
in 2014).([66]) In general,
there is scope to strengthen measures promoting evaluation of courts'
activities, use of online tools (e.g. for online publication of judgements) and
conducting surveys among court users or legal professionals. Reforms relating
to the Tax and Administrative Tribunals are proceeding more slowly than other
judicial reforms. A better use of operational tools such as annual work
programmes, performance targets and IT systems to support tax courts appears
necessary to improve the current situation. The rise in insolvency cases has
highlighted the need to increase resources and training for first instance
courts in this field. As regards highly regulated professions in the justice
sector, draft laws show that the Government intends to limit the ambition of
reforms previously agreed upon during the economic adjustment programme. 
Transparency in monitoring and reporting
of public procurement procedures is being improved, but challenges remain. Portugal is reviewing the BASE portal, an online platform that
provides a detailed data on all public procurement contracts. This enables the
Court of Auditors and the Inspectorate for Finances (IGF) to step up and
streamline their scrutiny. Remaining gaps concern the transparency of
concessions and delays in publishing data on contracts awarded by local and
regional authorities. A dedicated and skilled taskforce (UTAP) at the Ministry
of Finance is working to improve fiscal transparency and reporting on PPPs, but
the regional and local levels are outside its remit and there is no consistent
framework for establishing equivalent structures. In the area of conflict of
interests, incompatibilities and revolving doors, where legislation is largely
in place, significant shortcomings remain in terms of maximizing the impact of
transparency in preventing corruption by effective monitoring, implementation
and sanctions. Since the publication of public procurement codes in 2012, all
public administrations are obliged to have plans for tackling corruption on the
basis of risk assessment, but progress in monitoring and analysing such risks
has been slow and has not resulted in an integrated strategy for the prevention
of corruption. According to the EU Anti-Corruption Report, published in 2014,
the reasons for such shortcomings also include weaknesses in the law
enforcement, prosecution allegations of corruption, preventive action on party
funding and in control systems in urban planning decisions. Overall, much
remains to be done to prosecute high-level corruption and complex corruption
and economic and financial crimes effectively and to improve rates of final
convictions and sanctions.
Progress in effectively implementing the
urban lease reform and comprehensively monitoring the Portuguese housing sector
has been limited. The Portuguese Government has
recently enacted amendments to the urban lease law which risk undermining the
soundness and effectiveness of the overall framework. In particular, changes to
the commercial lease framework have enlarged the universe of companies covered
by the transitional period([67]) to micro
enterprises (about 95% of Portuguese companies) and to non-profit institutions
which cover areas of ‘national interest’. The transitional period, already
relatively long, has also been extended by one additional year. These two
changes might create legacy privileges and dual markets and prevent the
Portuguese housing market from becoming more dynamic. The legal arrangements
covering works in lease buildings have been changed so that landlords can
terminate a lease contract only in case of structural works that are validated
by the local authority.  By the recommended deadline (the end of December
2014), the authorities had not done anything to develop more comprehensive and
reliable monitoring procedures, which are essential to overcome the lack of
data and for a systematic analysis of the impact of recent reforms on the
housing market and on trends in that market. The authorities announced their
intention of stepping up efforts to combat tax evasion in the rental market.
However, by the recommended deadline ( the end of December 2014), they had not
provided the comprehensive study to identify the shadow economy in the rental
market, which had been requested under the programme. At the end of January
2015, the authorities issued a decree setting up a working group tasked with
implementing a monitoring model of the housing market. The authorities
confirmed their commitment to providing a study on the shadow economy in the
Portuguese rental market according to the following roadmap: implementation of
the tax measures to curb (January-May 2015); data compilation and assessment
(June-July 2015); report finalisation (end of August 2015)
The lack of a comprehensive and
systematic approach to monitoring and evaluation makes it difficult to assess
the full impact of reforms on the functioning of the economy. Portugal's government effectiveness is close to the EU average ([68]), yet Portugal is less effective in using evidence-based
instruments than most other countries ([69]), as the consistency and quality of impact assessments is not systematically
checked and the related methodology is not formalised. Relevant external
stakeholders are not always able to provide meaningful and timely input into
regulatory processes, and the results of impact assessment are not systematically
published. Moreover, as attention is now shifting to the implementation of the
several reforms adopted under the macro economic adjustment programme, it is
essential to assess whether they effectively contributed to boosting
competitiveness, output and employment growth. The government is planning to
contract in 2015 an evaluation on the overall impact of structural reforms. 
Portugal continues to implement further
measures to cut the electricity tariff debt and to help keep end-user energy
costs in check, although these appear insufficient to achieve the targeted
outcomes. In April 2014, the Portuguese authorities
presented a third package of measures designed to tackle remaining excess rents
in the energy sector, further reduce the electricity tariff debt and achieve a
more balanced distribution of economic surplus between different stakeholders.
Some of these measures have been taken during the past year, including a major
expansion of the social electricity tariff (intended to be effectively financed
by reducing excess rents enjoyed by generators) and an extension to 2015 of the
special levy on energy operators (which should contribute EUR 50mm to reducing
tariff debt. Other announced measures, including legislation designed to
redistribute windfall profits enjoyed by the incumbent on natural gas
take-or-pay contracts, are in advanced stages of preparation. However, the
incremental impact of these initiatives is expected to remain fairly modest,
and clearing the tariff debt by 2020, while limiting price increases for end
users as targeted, will likely remain a major challenge. According to the
latest updated projections (October 2014), the tariff debt will peak at EUR 4.8
billion in 2015, before gradually falling to EUR 1 billion by 2020. This new
estimate is about EUR 400 million higher than previous projections, which
implies that the proposed headline electricity tariff increase of 3.3% for 2015
will not be sufficient to achieve the overall target for the electricity tariff
debt by 2020. In parallel, this negative development poses a risk to the
authorities' original target of limiting annual price increases to 1.5-2.0%
above inflation. This means that meeting the 2020 debt target may call for
persistently higher tariffs than those originally projected. One important factor
underlying these adverse tariff debt developments is a significant rise in
fraudulent electricity consumption in recent years; it will thus be of key
importance that the authorities address this problem propmptly and robustly. In
addition, the authorities should also continue identifying further ways of
cutting remaining rents in the energy sector, so as to reduce the tariff debt
faster while minimising energy price increases for households and firms.
Further work is also needed to address environmental issues and weaknesses in a
number of areas, especially waste and water management. It thus remains
essential to adopt and implement initiatives such as the green growth strategy,
announced in 2014, to encourage a transition to a more efficient and low-carbon
economy in Portugal.
Portugal is taking action to improve the
cross-border integration of its energy networks, but investment activity needs
to be accelerated Portugal is quite well-connected
with the Spanish energy networks and is working to improve these electricity
and gas interconnections further. However, the current low level of electricity
and gas interconnection capacity between the Iberian Peninsula and the rest of
the EU is a major obstacle to establishing a regional market in the south-western
region. In January 2015, the transmission system operators of Spain, France and
Portugal signed a joint strategy paper on developing interconnections between
the Iberian Peninsula and the internal electricity market. This paper lists
shared goals and indicates which options for projects would increase the
current interconnection capacity. This strategy is essential to reach the
minimum interconnection level of 10% agreed by the European Council in October
2014. The need to improve cross border integration of the energy networks and
to speed up the implementation of the electricity and gas interconnection
require an acceleration of investment activity. 
Portugal remains on track to meet EU
2020 renewable energy targets. The share of
renewables has been rising steadily in recent years, thanks to the Portuguese
energy policy of reducing the country's reliance on fossil fuels. According to
the National Renewable Energy Action, Portugal has made a commitment to
increasing the share of renewables to 31% by 2020. In 2013 the renewable energy
production accounted for 25,7% of the final energy consumption, exceeding the
interim target (23,7 %) for the same year. 
Portugal is on track to meet the EU 2020
energy efficiency target. The national energy
efficiency target of 25% by 2020 is being fulfilled. However, further policies
should be pursued to ensure that a sustainable and durable decrease of energy
consumption builds on structural changes and not only on cyclical factors such
as the slowdown of the economic activity. This is particularly important for
the building and housing sectors where the effective transposition and
implementation of the energy performance of buildings directive (EPBD-recast)
deserves close monitoring. 
Portugal has made little progress in making
its new regulatory framework for the transport sector fully operational and in
refining its long-term transport plan. In late
spring 2014, Portugal adopted the legal framework for its new transport
regulatory authority (AMT), which replaces three former transport regulators
(rail, ports and road). This initiative was designed to ensure stronger and
better coordinated regulatory monitoring, improve competition and reduce
end-user costs. After passing AMT's bylaws, the Portuguese authorities were
required to make the new regulator fully operational by September 2014.
However, as a result of repeated delays in appointing AMT's Board and of
recently published amendments to the bylaws, this essential step towards
strengthening the transport sector's regulatory framework has been delayed and
the AMT is not fully operational yet. In addition, Portugal has adopted an
integrated strategic plan for its transport system (PETI 3+), with a view to
prioritising infrastructure investments in a rationalised and cost-effective
manner, coordinated across different transport modes and based on a
well-defined long-term vision. EU Structural Funds are expected to support some
of the investment projects under this plan. However, it still needs to be
refined further. In particular, it could benefit from more focus and better
prioritisation, underpinned by a sound analysis of transport demand; moreover a
realistic and mature project pipeline has yet to be presented. Project
preparation must therefore be a matter of priority, in particular for the
larger infrastructure rail and port investments.
Although earlier reforms in Portugal's
ports system are gradually producing benefits, limited progress has been made
with important further measures to boost competition and cost-effectiveness. In early 2013, a new law on port labour took effect, which was
intended to tackle key bottlenecks and significantly improve the competitive
position of Portuguese ports. This new law required re-negotiation of
collective agreements in force in Portuguese ports, and together with the
gradual elimination of port use fees (TUP-Carga), it allowed a significant
downward adjustment of port operating costs. In order to ensure that shippers
benefit fully from these cost savings, a key next step involves renegotiating a
number of port concession contracts, particularly those with a long remaining
term left, in order to reduce end-user costs, to align incentives, to boost
competition and to encourage investments while achieving appropriate
risk-sharing between port authorities and private-sector operators. However, the legal terms and conditions underpinning these renegotiations are
still unclear, throwing into question their compliance with EU public
procurement rules and their effectiveness in boosting competition, investments
and the overall port operations in general. Moreover,
these negotiations have proceeded slowly and in a piecemeal fashion, with
little concrete progress made so far; in addition, focus seems to have shifted
somewhat away from the original goal of reducing port usage costs for shippers. Part of the underlying problem appears to
be a lack of resources within UTAP, the Ministry of Finance body overseeing the
concession renegotiations. A number of other smaller-scale reforms in the ports
sector (summarised in a "chronogram" published by the Portuguese
authorities in 2014 have not seen significant overall progress either.
The merger of the railway and road
infrastructure managers is anticipated to deliver significant additional cost
savings, but liberalisation measures in railways and urban public transport
continue to proceed at a slow pace. Achieving
operational balance of the rail infrastructure manager (REFER) by 2015 remains
a major railway policy objective. After taking various measures to this end
over the course of 2013 and early 2014 (including cost rationalisation, closure
of loss making lines and staff cuts), the Portuguese authorities have announced
that REFER will be merged with road infrastructure manager EP in order to
achieve further cost-savings. A Planning Commission to supervise the merger was
appointed in August 2014, and both the legal and operational aspects of the
merger are expected to be completed over the course of 2015. Synergies from the
merger are projected to be sufficient to structurally bring REFER to
operational balance. In addition, Portugal is expected to launch the
privatisation of CP Carga, the state-owned freight operator, after the
unbundling of its terminals, which would contribute to improving the governance
of the company and attracting more customers to the railway freight market. The
process of transferring the terminals to REFER started in April 2014 (after
repeated postponements) and is currently still under way while the
privatisation process itself has yet to start. Similarly, the introduction of
competition on the commercial sub-urban railway lines (Lisbon and Porto) could
create new business or investment opportunities for potential entrants, but
this measure has incurred significant delays as well. The tender process for
the Porto public transport concessions was launched over the summer and wound
up in January 2015, several months later than planned. The tender for Lisbon is
expected to be launched by the end of the first quarter of 2015, just after the
PSO contracts are signed.
 Commitments || Summary assessment([70]) 
 2014 Country specific recommendations (CSRs) 
 CSR1: Implement the necessary fiscal consolidation measures for 2014 so as to achieve the fiscal targets and prevent the accumulation of new arrears. For the year 2015, implement a revised budgetary strategy in order to bring the deficit to 2.5 % of GDP, in line with the target set in the Excessive Deficit Procedure Recommendation, while achieving the required structural adjustment. Replace consolidation measures which the Constitutional Court considers unconstitutional by measures of similar size and quality as soon as possible. The correction of the excessive deficit should be done in a sustainable and growth-friendly manner, limiting recourse to one-off/temporary measures. After the correction of the excessive deficit, pursue the planned annual structural adjustment towards the medium-term objective, in line with the requirement of an annual structural adjustment of at least 0,5 % of GDP, more in good times, and ensure that the debt rule is met in order to put the high general debt ratio on a sustainable path. Prioritise expenditure-based fiscal consolidation and increase further the efficiency and quality of public expenditure. Maintain tight control of expenditure in central, regional and local administration. Continue the restructuring of the state-owned enterprises. Develop by the end of 2014 new comprehensive measures as part of the ongoing pension reform, aimed at improving the medium-term sustainability of the pension system. Control healthcare expenditure growth and proceed with the hospital reform. Review the tax system and make it more growth friendly. Continue to improve tax compliance and fight tax evasion by increasing the efficiency of the tax administration. Review the tax system and make it more growth friendly. Continue to improve tax compliance and fight tax evasion by increasing the efficiency of the tax administration. Strengthen the system of public financial management by swiftly finalising and implementing the comprehensive reform of the Budgetary Framework Law by the end of 2014. Ensure strict compliance with the Commitment Control Law. Effectively implement single wage and supplements' scales in the public sector from 2015 onwards. || Portugal has made some progress in addressing CSR 1 (this overall assessment of CSR 1 excludes an assessment of compliance with the Stability and Growth Pact):  ·       Some progress in fiscal structural measures. ·       Limited progress in developing new comprehensive measures as part of the ongoing pension reform, while some progress in proceeding with hospital reforms. ·       Some progress in reviewing the tax system. The PIT reform, the green taxation reform and additional measures associated with the CIT reform were adopted. Further improvements have been observed in the operationalisation of the e-invoice system, tax administration reform and other anti-fraud measures announced in the 2015 budget. ·       Some progress in improving the fiscal framework. The Budgetary Framework Law reform is expected in Q1-2015. A revision of the Commitment Control Law was approved in January, further strengthening budget control. ·        Some progress in implementing the single wage and supplement scales. The Law on Single Wage Scale (TRU) was published in September 2014 and has to be applied from January 2015. The Decree-law on the Single Supplements Scale (TUS) is under preparation. 
 CSR2: Maintain minimum wage developments consistent with the objectives of promoting employment and competitiveness. Ensure a wage setting system that promotes the alignment of wages and productivity at sectoral and/or firm level. Explore, in consultation with the social partners and in accordance with national practice, the possibility of mutually agreed firm-level temporary suspension of collective agreements. By September 2014, present proposals on mutually agreed firm-level temporary suspension of collective agreements and on a revision of the survival of collective agreements. || Portugal has made some progress in addressing CSR 2: ·       Limited progress in minimum wage developments. In October 2014 the government raised the minimum by 4.1% to be effective between 1 October 2014 and 31 December 2015. The increase occurred after agreement with the social partners. At the same time employers' social security contributions were cut from 23.75% to 23% for employees who had been on minimum wage without interruption, since May 2014. ·       Some progress in ensuring a wage setting system that promotes the alignment of wages and productivity at sectoral and/or firm level: specific measures are described below. ·       Limited progress as regards the introduction of mutually agreed firm-level temporary suspension of collective agreements. Legislation was adopted in August 2014 and enacted in September 2014: however, new rules require agreement from the original signatories of the sectoral agreement, making implementation more difficult. ·       Full implementation regarding the presentation of proposals on the survival of collective agreements. In August 2014 the authorities have passed legislation reducing the survival period of collective agreements expired and not renewed. ·       No progress concerning criteria for the extension of collective agreements: in June 2014 less stringent criteria for the extension of collective agreements have been introduced compared to those required since 2012. The potential generalisation of extensions of collective agreements is likely to hinder efficient wage adjustment at firm level. 
 CSR3: Present, by March 2015, an independent evaluation of the recent reforms in the employment protection system, together with an action plan for possible further reforms to tackle labour market segmentation. Pursue the ongoing reform of active labour market policies and Public Employment Services aimed at increasing employment and labour participation rates, specifically by improving job counselling/job search assistance and activation/sanction systems with a view to reducing long-term unemployment and integrating those furthest away from the labour market. Address the high youth unemployment, in particular by effective skills anticipation and outreach to non-registered young people, in line with the objectives of a youth guarantee. Ensure adequate coverage of social assistance, including the minimum income scheme, while ensuring effective activation of benefit recipients. || Portugal has made some progress in addressing CSR 3: ·       No progress in presenting, by March 2015, an independent evaluation of the recent reform in employment protection legislation. ·       Some progress in terms of active labour market policies implementation. However, the effectiveness of employment and training measures need to be carefully monitored. As regards the PES, despite progress achieved with the PES reform, the caseload remains very high. ·       Some progress in implementing the Youth Guarantee (YG) and engaging all relevant governmental and non-governmental partners in its implementation. However, substantial challenges remain, notably the capacity of PES as coordinator of the YG to engage the YG network partners and the need to reach out to all non-registered young people, not in employment, education or training (NEETs). ·       No progress in ensuring adequate coverage of social assistance, including the minimum income scheme. 
 CSR4: Improve the quality and labour-market relevance of the education system in order to reduce early school leaving and address low educational performance rates. Ensure efficient public expenditure in education and reduce skills mismatches, including by increasing the quality and attractiveness of vocational education and training and fostering cooperation with the business sector. Enhance cooperation between public research and business and foster knowledge transfer. || Portugal has made some progress in addressing CSR 4: ·       Some progress in improving the quality and labour-market relevance of the education through: the reform of curricula; the reform of teachers statutes; the development of the monitoring tool: the further development of the evaluation system for teachers and schools; the diversification of pathways implemented with new Vocational Education Training (VET) programs; an increased number of hours of on the job training in VET options; a National skills Strategy; the creation of TESPs courses (more than 90 authorisations so far but most of the beneficiaries have not yet started the programmes in practical terms). ·       Some progress towards a more efficient public spending through the rationalisation of the schools network and a new funding formula to provide more incentives to better performing schools. ·       Limited progress in improving cooperation between public research and business and encouraging knowledge transfer. There are still weak and scattered policy incentives for the cooperation between public research performing organisations and businesses. The role of the Innovation Agency has been reformulated and its governance has been streamlined. However, the announced action plan has not been implemented yet. 
 CSR5: Monitor banks' liquidity position and potential capital shortfalls, including by on-site thematic inspections and stress-testing. Assess the banks' recovery plans and introduce improvements to the evaluation process where necessary. Implement a comprehensive strategy to reduce the corporate debt overhang and reinforce efforts to widen the range of financing alternatives, including for early stages of business developments, by enhancing the efficiency of the debt restructuring tools (particularly PER and SIREVE) for viable companies, introducing incentives for banks and debtors to engage in restructuring processes at an early stage and improving the availability of financing via the capital market. Ensure that the identified measures support the reallocation of financing towards the productive sectors of the economy, including to viable SMEs, while avoiding risks to public finances and financial stability. Implement, by end September 2014, an early warning system mainly with supervisory purposes, to identify firms, including SMEs, with a high probability of default due to an excessive level of indebtedness, and which can, indirectly, promote early corporate debt restructuring. || Portugal has made substantial progress in addressing CSR 5: ·       Substantial progress in monitoring banks' liquidity and capital position and assess banks' recovery plans. Portugal has announced the following measures: -      Follow-up by Banco de Portugal to the Comprehensive Assessment exercise -      Analysis of pillar 1 and 2 regulatory measures to promote corporate debt restructuring or sale/transfer of underlying exposures ·       Substantial progress in implementing measures to reduce corporate debt overhang. Portugal has adopted the Strategic plan for Corporate Debt Restructuring (published) ·        Some progress in widening the range of financing alternatives for corporates: formal establishment of Development Financial Institution (DFI), intended to help address market failures which hamper SME access to finance (company licence issued in September 2014) ·       The early warning system is fully implemented. Portugal has implemented the following measures: -      early warning system for defaults; -      overhaul of corporate insolvency and restructuring framework, with stronger focus on recovery of firms rather than liquidation 
 CSR6: Implement the second and third packages of measures in the energy sector aimed at reducing energy costs for the economy, while eliminating the electricity tariff debt by 2020, and closely monitor implementation. Improve the cross-border integration of the energy networks and speed up implementation of the electricity and gas interconnection projects. Implement the comprehensive long-term transport plan and the ‘chronogram’ setting out the ports sector reforms. Complete the transports concessions for the metropolitan areas of Lisbon and Oporto. Ensure that the renegotiations of the existing port concessions and the new authorisation schemes are performance-oriented and in line with internal market principles, in particular procurement rules. Ensure that the national regulatory authority for transport (AMT) is fully independent and operational by the end of September 2014. Ensure the financial sustainability of the state-owned enterprises in the transport sector. Strengthen efficiency and competition in the railways sector, by implementing the plan for the competitiveness of CP Carga, after the transfer of the freight terminals while ensuring the management independence of the state-owned infrastructure manager and railway undertakings. || Portugal has made some progress in addressing CSR6: ·       Some progress in implementing the second and third packages in the energy sector. Portugal has implemented the enhanced electricity social tariff (part of the third package of energy sector measures) and approved the extension of the special energy levy (included in the 2015 budget). Despite some progress, excessive rents still exist and also the electricity tariff deficit needs to be further addressed, through a set of credible additional measures. Taxes on electricity have risen for customers in recent years, mitigating progress made through interconnections that lower prices thanks to competition.  Overall the real cost of energy has fallen in Portugal. Some progress has been made in improving the cross-border integration of the energy networks. On 6 January 2015 in Brussels, the Spanish, French and Portuguese transmission system operators signed a joint strategy paper to develop interconnection between the Iberian Peninsula and the internal electricity market. The joint strategy paper lists shared goals and indicates which options for projects have the potential to increase the current interconnection capacity. This strategy will be important in reaching the minimum interconnection level of 10% agreed by the European Council in October 2014. ·       Limited progress in implementing the long-term transport plan and ports sector chronogram. These measures are longer-term so they are likely to be only partially completed by the summer of 2015. Limited progress has been observed in transports concessions for the metropolitan areas of Lisbon and Porto. These measures have incurred significant delays as well. The tender process for the Porto public transport concessions was launched over the summer and has been concluded in January 2015, several months later than planned. The tender for Lisbon is expected to be launched by the end of first quarter of 2015, just after the PSO contracts are signed. Limited progress has been made in the port concession renegotiations that have proceeded at a slow pace and will likely continue to do so; as a result, completion by the summer of 2015 is unlikely. No progress has been made in ensuring that the Transport regulator is fully operational (the recommended deadline was the end-September 2014). On 2 February 2015, a new amendment to the AMT bylaw was published. The amended legislation extends the AMT’s establishment period (due by the end of September 2014). The new provision states that AMT is legally able to carry out its assignments from February 2015. Limited progress has been observed in the railways sector. The merger between EP/REFER is ongoing. Further progress was made with staff reductions in transport sector SOEs; this will continue in 2015. The planning commission for the EP-REFER merger was nominated in August 2014 (intended to improve transport SOEs' financial sustainability). 
 CSR7: Further improve the evaluation of the housing market, including by setting up, by the end of 2014, a more systematic monitoring and reporting framework and issue a comprehensive report on the shadow economy in that market. Continue efforts to carry out further inventories of regulatory burden with a view to including, by March 2015, sectors not yet covered. Adopt and implement, by the end of September 2014, the outstanding licensing decrees and sectoral amendments. Remove, by the end of September 2014, remaining restrictions in the professional services sector and enact the professional bodies' amended bylaws which have not yet been adopted under the macroeconomic adjustment programme. Eliminate payment delays by the public sector. Ensure adequate resources of the national regulators and competition authority. || Portugal has made limited progress in addressing CSR 7: ·       No progress by the end of 2014 (recommended deadline) in further improving the evaluation of the housing market, including by setting up, by the end of 2014, a more systematic monitoring and reporting framework and issue a comprehensive report on the shadow economy in that market. At the end of January 2015, the authorities published a decree establishing a working group tasked with implementing a monitoring model of the housing market. The study on the shadow economy in the Portuguese rental market is now expected to be issued at the end of August 2015 ·       Some progress in continuing efforts to carry out further inventories of regulatory burden with a view to including, by March 2015 sectors not yet covered. Under the SIMPLIFICAR initiative, Portugal is implementing a road map to reduce regulatory burdens. Work is ongoing, although with some delay, to further improve the business-friendliness of the regulatory environment. This includes approving the methodology for impact assessment of legislation which includes the "one-in/one-out" rule and broadens the scope of the existing inventory of the most burdensome regulations to include new sectors, such as tourism, construction and agriculture. To this end, a governance framework for centralised regulatory simplification activities is being set up, based on inter-ministerial coordination and stakeholder engagement mechanisms. ·       No progress by the end-September 2014 (recommended deadline) in adopting and implementing all outstanding sectoral amendments. Some outstanding sectoral amendments, precious metals, mining and some legislation on territorial planning, have not yet been implemented. There is no political will to approve a new law on universities. Some progress was made after the recommended deadline: -      the law on land registration experts was published on 9 January 2015; -      the new commercial licensing regime was published on 16 January 2015; -      the legal framework for the single environmental license was approved by the Council of Ministers at the end of January 2015. -      copyright collective management societies, electricians, bullfighters, gas installation services and professionals, general law on construction, general law on construction professionals were all approved by the Council of Ministers and sent to Parliament during in 2014. All were  approved by the Parliament at first reading. ·       No progress by the end of September 2014 (recommended deadline) in removing, the remaining restrictions in the professional services sector. However, limited progress has been made recently on removing restrictions in the professional service sector. The general law on professional partnerships was approved in the Council of Ministers of 18/12/2014 and sent to Parliament for enactment. No progress by the end of September 2014 (recommended deadline) in enacting the professional bodies' amended bylaws. None of the outstanding 18 bylaw of highly regulated professions has been implemented. 9 draft bylaws for highly regulated professions are reportedly finalised but have not yet been approved by the Council of Ministers. The remaining 9 draft bylaws are experiencing delays, mainly due to non-compliance with the framework law for highly regulated professions and with EU law (particularly the bylaws from the Ministry of Justice for lawyers, solicitors, enforcement agents, notaries) ·       No progress in eliminating payment delays by the public sector. ·       Some progress in ensuring that the national regulators and competition authority have adequate resources.  The Competition bylaw was published in August 2014. As regards the outstanding NRAs bylaws, the CMVM and ISP statutes were published on 6 January 2015; ANAC and ANACOM bylaws were approved by the Council of Ministers at the end of December 2014. A new amendment to the AMT bylaw was published on 2 February 2015. 
 CSR8: Continue to rationalise and modernise central, regional and local public administration. Implement the reforms to enhance the efficiency of the judicial system and increase transparency. Step up efforts to evaluate the implementation of reforms undertaken under the macroeconomic adjustment programme as well as planned and future reforms. In particular, insert mandatory systematic ex ante and ex post assessments in the legislative process. Set up a functionally independent central evaluation unit at government level, which assesses and reports every six months on the implementation of these reforms, including consistency with the ex-ante impact assessment, with corrective action if needed. || Portugal has made some progress in addressing CSR 8: ·       Some progress in rationalising and modernising central, regional and local public administration. Portugal announced a global strategic plan to rationalize and reduce ICT costs in public administration (at early stages of defining scope and implementing roadmaps). In the context of the SIMPLIFICAR initiative, Portugal is: -      implementing the road map for the reduction of regulatory burden; -      further making the regulatory environment more business-friendly, which includes approving the methodology for assessing the impact of legislation including the "one-in/one-out" rule; -      broadening the scope of the existing inventory of the most burdensome regulations to cover new sectors, such as tourism, construction and agriculture. A centralised governance framework for regulatory simplification activities is being set up for this purpose, based on inter-ministerial coordination and stakeholder engagement mechanisms. -      Portugal has also implemented the Municipality Support Fund (FAM), a debt work-out mechanism for over-indebted municipalities which was formally established in August 2014. Preparations have started for the 2015 roll-out of the "Aproximar" strategy (designed to reorganise the public services network at local level). ·       Some progress has been made in enhancing the efficiency of the judicial system and increasing transparency. The code of civil procedures has been adopted but no data are yet available on the clearance rate and disposition time under the new regime. Judicial reorganisation has had a slow start. It remains to be seen the real benefits in the coming years. IT applications for the Tax and Administrative Courts are still underdeveloped. Some progress has been made on improving transparency and combating corruption. Measures have been taken to further improve transparency in public procurement and private-public partnerships. Some challenges remain in implementing transparency requirements by local and regional authorities and in effectively applying the existing legal framework for the prevention of corruption and conflict of interests. ·       No progress has been made in evaluating the implementation of reforms undertaken under the macroeconomic adjustment programme as well as planned and future reforms. No progress was observed in setting up a functionally independent central evaluation unit. 
 Europe 2020 (national targets and progress) 
 Employment rate target (20-64 years old):75% || The employment rate has fallen on a yearly basis since the start of the economic crisis, from 73.1% in 2008 to 66.3% in 2012 and 65.4 % in 2013. Despite some recent labour market reforms to encourage job creation, the achievement of the national target of 75% by 2020 proves challenging. 
 R&D target: 1.36% of GDP || Portugal set a national R&D intensity target for 2020 of 3%, where public-sector R&D intensity would reach 1 % and business R&D intensity 2%. From 2000 up to the crisis years, Portugal made very significant progress towards the R&D intensity target. However, R&D intensity fell from 1.58% in 2009 to 1.36% in 2013, where public sector R&D intensity was 0.59% and business R&D intensity 0.65 %. Limited progress has been made. Portugal should make a major effort to ensure that investment in research and innovation is sustainable and efficient and to stimulate knowledge absorption by businesses. 
 Greenhouse gas (GHG) emissions target: -National Greenhouse gas (GHG) emissions target: 1% in 2020 compared to 2005 (in non-ETS sectors)   || On the basis of the latest national projections and taking into account existing measures, it is expected that target will be met: -31% in 2020 compared to 2005 (with a margin of 32% percentage points). Key measures are being implemented: the national climate change programme  "Programa Nacional para as Alterações Climáticas" for the period 2013-2020 (PNAC 2020) and the national low-carbon strategy " Roteiro Nacional de Baixo Carbono". 
 2020 Renewable energy target for Portugal: 31% Share of renewable energy in all modes of transport: 10% || In 2013, renewable energy production accounted for 25.7% of the final energy demand, (Source; EurObserv'ER).  Portugal is above the trajectory but more action is needed to maintain this situation until 2020. 
 Energy Efficiency target. Portugal has set an indicative national energy efficiency target of 25% reduction of final energy consumption in 2020, which implies reaching a 2020 level of 22.5 Mtoe primary consumption and 17.4 Mtoe final energy consumption. || Portugal is on track to meet its national target, which is however, somewhat unambitious. Although primary and final energy consumption fell between 2005 and 2012, Portugal should implement further policies to bring about structural changes and a sustainable reduction in energy consumption. Discussions with the national authorities in the framework of ESIF revealed problems with transposing the Energy Performance in Buildings Directive that need urgent action. 
 Early school leaving target: 10% || Early school leaving has fallen gradually over the last decade from 45% in 2002 to 20.8% in 2012 and 18.9% in 2013. However, the rate of early school leaving remains among the EU's highest. 
 Tertiary education target: 40% || See paragraph above. Tertiary education attainment was 30% in 2013. There has been remarkable progress from rates of about 11% at the beginning of last decade. However, attainment remains significantly below the EU average. Some efforts are being made to address the skills mismatch and lack of employability of higher education graduates in Portugal. They include reforming the VET system, publishing employment rates and the rationalising career offer. However, more robust actions would be needed to improve its quality, labour market relevance and attractiveness of tertiary education. 
 The target envisages reducing the number of persons in or at risk of poverty and social exclusion by 200 000 persons in 2020.   || The number of people living at risk of poverty or social exclusion rose by 210,000, from 2,667,000 in 2012 to 2,877,000 in 2013. Sustained efforts will be needed in the future, specially taking into account the latest data and the projected demographic trends. 
 Table B.1:       Macroeconomic indicators 
 (1) The output gap constitutes the gap between the actual and potential gross domestic product at 2010 market prices. (2) The indicator of domestic demand includes stocks. (3) Unemployed persons are all those who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74. Source: European Commission 2015 winter forecast; Commission calculations 
 Table B.2:       Financial market indicators 
 (1) Latest data November 2014. (2) Latest data Q2 2014. (3)  A new calculation method for nonperforming loans that follows the methodology of the Financial Soundness Indicators Compilation Guide was introduced in September 2011. Historical annual data have been revised accordingly, back to 2006. (4) Latest data September 2014. (5) Latest data June 2014.  Monetary authorities, monetary and financial institutions are not included. * Measured in basis points. Source: IMF (financial soundness indicators); European Commission (long-term interest rates); World Bank (gross external debt); ECB (all other indicators). 
 Table B.3:       Taxation indicators 
 (1) Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2014), Taxation trends in the European Union, for a more detailed explanation. (2) This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital. (3) VAT efficiency is measured via the VAT revenue ratio. It is defined as the ratio between the actual VAT revenue collected and the revenue that would be raised if VAT was applied at the standard rate to all final (domestic) consumption expenditures, which is an imperfect measure of the theoretical pure VAT base. A low ratio can indicate a reduction of the tax base due to large exemptions or the application of reduced rates to a wide range of goods and services (‘policy gap’) or a failure to collect all tax due to e.g. fraud (‘collection gap’). It should be noted that the relative scale of cross-border shopping (including trade in financial services) compared to domestic consumption also influences the value of the ratio, notably for smaller economies. For a more detailed discussion, see European Commission (2012), Tax Reforms in EU Member States, and OECD (2014), Consumption tax trends. Source: European Commission 
 Table B.4:       Labour market and social indicators 
 (1) Unemployed persons are all those who were not employed, but had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. Data on the unemployment rate of 2014 includes the last release by Eurostat in early February 2015. (2) Long-term unemployed are persons who have been unemployed for at least 12 months. Source: European Commission (EU Labour Force Survey and European National Accounts) 
 Table B.5:       Expenditure on social protection benefits (% of GDP) 
 (1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI). (2)  At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national equivalised median income. (3) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour TV, or ix) have a telephone. (4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. (5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 (2007 survey refers to 2006 incomes). (6) 2014 data refer to the average of the first three quarters. Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 
 Table B.6:       Product market performance and policy indicators 
 (1) Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed. (2) Patent data refer to applications to the European Patent Office (EPO). They are counted according to the year in which they were filed at the EPO. They are broken down according to the inventor’s place of residence, using fractional counting if multiple inventors or IPC classes are provided to avoid double counting. (3) The methodologies, including the assumptions, for this indicator are presented in detail here: http://www.doingbusiness.org/methodology. (4) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are presented in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm (5) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for the product market regulation indicators) 
 Table B.7:       Green growth 
 Country-specific notes:         2013 is not included in the table due to lack of data.        General explanation of the table items:        All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)                  Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)                  Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)                  Resource intensity: Domestic material consumption (in kg) divided by GDP (in EUR)                  Waste intensity: waste (in kg) divided by GDP (in EUR)        Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP          Energy weight in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP        Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % change)        Environmental taxes over labour or total taxes: from DG TAXUD’s database ‘Taxation trends in the European Union’        Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR)         Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP        Electricity and gas prices for medium-sized industrial users: consumption band 500–2000MWh and 10000–100000 GJ; figures excl. VAT.        Recycling rate of municipal waste: ratio of recycled municipal waste to total municipal waste        Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP        "Proportion of GHG emissions covered by ETS: based on greenhouse gas emissions (excl LULUCF) as reported by Member States to the European Environment Agency "        Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value added (in 2005 EUR)        Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value added of the transport sector        Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of international bunker fuels        Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin        Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels        Renewable energy share of energy mix: %-share of gross inland energy consumption, expressed in tonne oil equivalents        * European Commission and European Environment Agency        ** For 2007 average of S1 & S2 for DE, HR, LU, NL, FI, SE & UK. Other countries only have S2.        *** For 2007 average of S1 & S2 for HR, IT, NL, FI, SE & UK. Other countries only have S2.        Source:  European Commission unless indicated otherwise; European Commission elaborations indicated below 
([1])  The poverty gap is defined as the difference between the median
equivalised total net income of persons below the at-risk-of-poverty threshold
and the at-risk-of-poverty threshold, expressed as a percentage of the
at-risk-of-poverty threshold. It provides an indication of the severity of
poverty for those experiencing it.
([2])  Greece and Cyprus are the only EU
countries reporting a more negative International Investment Position than
Portugal. 
([3])  The inverse of the ICOR = (I/Y)/(ΔY/Y) is a measure of output growth
associated with any given investment. Other things being equal, a lower ICOR
indicates higher quality or efficiency of investment.
([4])  Baldi et al. (2014), 'Weak Investment
Dampens Europe's Growth', DIW Economic Bulletin, DIW.
([5])  Other investments include the financing
received during the economic adjustment programme, which accounted for about
40% of total NIIP in 2013. 
([6])  It is riskier to finance the current
account through loans than through equity as equity
flows allow risk sharing between domestic and foreign investors, while debt
flows do not.
([7])  The current account and net lending/
borrowing components are reported in accordance with the BoP methodology under
the reviewed ESA2010 and BPM6. The measurement of the current account using
National Accounts provides a similar picture of a marked turnaround of the
current account balance since 2008, although it is estimated to have remained
negative still in 2014.
([8])  About 54% of the swing in the current
account in 2010-13 is presumably due to "residual" structural
factors, such as improved product and geographical specialisation of exports.
([9])  Exports still account for a small
proportion of GDP in 2013 in comparison with other countries in the euro area
such as Ireland (105%), The Netherlands (83%), Belgium (83%) or Austria (54%).
([10]) See European Commission, 'The Economic
Adjustment Programme for Portugal tenth review', European Economy, Occasional
Paper 171, 2014', pp. 41-43.
([11]) Physical unit
labour costs (PULCs) are defined as the unit
labour cost, in euros, of producing a given quantity of an export product.
([12]) The three main Portuguese trading
partners belong to the euro area, i.e. Spain, Germany and France. They account
for about 50% of total exports.
([13]) E.g., Cecchetti et al. (2011), 'The Real
Effects of Debt', BIS Working Papers No 352.
([14]) Non-consolidated. The consolidated debt
level was about 120% of GDP, Ministry of Economy.
([15]) Goretti, M. and M. Souto (2013), 'Macro-Financial Implications of
Corporate (De)Leveraging in the Euro Area Periphery', IMF Working Paper No.
13/154.
([16]) Most mortgages have a very low but fixed
mark-up on the Euribor.
([17]) EBITDA: Earnings before interest,
taxes, depreciation, and amortisation; source: BACH Database.
([18]) Financial Stability Report, November 2014, Banco de Portugal.
([19]) Before the decision by Banco de
Portugal to apply a resolution measure to Banco Espírito Santo, Espírito Santo
Financial Group had been subject to the comprehensive assessment carried out by
the ECB and it had concluded the Asset Quality Review (AQR) phase of the
Comprehensive Assessment, which had focused on the review of the loan
portfolio, in line with the procedure applicable to all the Portuguese banks.
However, Novo Banco was excluded from the disclosure of the AQR results,
published on the 26th October 2014 due to the fact that its opening balance
sheet was not available and thus it was not possible to conclude on the impacts
on the bank’s solvency ratios.
([20]) Banco Comercial Português, which failed
the stress test's adverse scenario, submitted a capital plan to the ECB. The
plan was subsequently accepted by the ECB.
([21]) EC Enterprise and Industry, 2014 Small Business Act for Europe
(SBA), Portugal factsheet. Despite the unfavourable economic environment for
SMEs in Portugal, 2.4 new businesses were set up in 2013 for every one that
closed. The number of new companies created — 35,296 — was 12.8 % higher than
in 2012, and growth was consistent throughout the year and in all sectors, except
for electricity, gas and water. Most new businesses were created in the
services sector (accounting for almost one third of all new firms), trade (16
%) and accommodation and food services (11 %).
([22]) Bornhorst, F. and M. Ruiz-Arranz (2013), 'Indebtedness
and deleveraging in the euro area', Euro Area Policies: 2013 Article IV
Consultation, Selected Issues Paper, IMF Country Report No. 13/232.
([23]) The unemployment gap in 2014 (difference between the NAWRU and the
unemployment rate) is about 2.4%. However, the NAWRU itself varies with the
cycle leading to overestimation of structural unemployment in crisis periods.
Estimations of the NAWRU for Portugal, controlling for its determinants (TFP
growth, growth in net capital stock, tax wedge and active and passive labour
market policies), hint at structural unemployment that is considerably lower
than the NAWRU (ECFIN's Labour Market Developments 2013, pp. 84-89).
Nonetheless, the same report shows a sharp increase in skill mismatches after
the crisis (p. 76).
([24]) Population projections suggest that the
working–age population would shrink by 4.9% over the period 2013-2020 and a
further 14.6% over the period 2020 to 2060 (Ageing Report 2015). Active population aged 25-54 already declined by more than 200 000
people between 2010 and 2014. Outward migration may have played a role. While
outward migration could have functioned as an adjustment channel during the
crisis, the loss of active population will weigh on potential growth, unless
Portugal succeeds in creating the conditions to attract the population it lost
due to emigration during the recent crisis.
([25]) Between the first and the third quarter of 2014, employment rose
by 120,000 people. The number of people in employment programmes rose from
65,900 in January 2014 to 151,000 in September 2014 (85,000 people). 
([26]) Varga et al. (2013), 'Growth effects of structural reforms in
Greece, Italy, Portugal and Spain', European Economy, Economic Papers 511, show
that decreasing the share of low-skilled workers and increase the share of
high-skilled workers can contribute substantially for GDP growth in Portugal.
([27]) The changes in the survival regime
reduced the duration of collective agreements after their expiration from 18
months to one year. In addition, the law reduced from five to three years the
time needed for a collective agreement that make its expiry depend on the
existence of a new agreement to enter in a period of survival.
([28]) According to PT authorities, this
requirement is justified in view of the Constitution, which attributes the
worker representation’s monopoly to trade unions.
([29]) That is to make collective agreements
legally binding for all employees and employers in a certain sector.
([30]) In May 2011, the government temporarily suspended the common
practice of extending sectoral collective agreements to all firms in the
sector. In November 2012, it introduced a quantitative criterion for extensions
of collective agreements which established that sectoral collective agreements
could be considered for extension only if the employers' associations' signing
the agreements employed at least 50% of workers in the sector. In June 2014, a
new legislative change made extension possible if SME's accounted for at least
30% of the employers' associations signing the agreement.   
([31]) Firm-level collective agreements prevail over higher level
agreements, as no favourability clause exists. However, the number of
collective agreements at firm level is limited. Various measures have been
taken to boost firm-level bargaining or the adaptability of sectoral collective
agreements at firm-level: (i) the 2009 Labour Code revision introduced the
possibility for unions to delegate to works councils the possibility of
concluding firm-level collective agreements in firms employing 500 or more
workers; (ii) the 2012 Labour Code revision lowered the threshold for
delegation to 150 workers; (iii) the 2012 Labour Code revision also introduced
the possibility of sectoral collective agreements setting the conditions under
which the agreement could be changed at firm level. No use has ever been made
of these options. 
([32]) A detailed description of the recent developments relating to the
minimum wage in Portugal can be found in: 'Post-Programme Surveillance for
Portugal', European Economy. Occasional Paper 208, December 2014, pp. 32-34.
([33]) Two empirical studies produced in 2011 found (small) negative
employment effects of the increases in the minimum wage between 2006 and 2011,
before the latest package of labour market reforms: Carneiro et al. (2011) 'Estudo sobre a Remuneração Mínima Mensal Garantida em Portugal
– Relatório Final'; and Centeno et al. (2011), 'The
Impact of the Minimum Wage on Low-wage Earners', Banco de Portugal – Economic
Bulletin. Further information and data can be found in a report produced by the
Ministry of Economic Affairs and Employment at the end of 2012 (available at
http://www.portugal.gov.pt/pt/os-ministerios/ministerio-da-economia-e-do-emprego/documentos-oficiais/20121216-salario-minino-2013).
([34]) Decree-Law No. 13/2015, 26 January 2015
([35]) Employment
measures such as hiring incentives and traineeships were aggregated in two
groups: "Stimulus Employment Programme"; and "Employment
Traineeships", making it easier for the unemployed to know which measures
are available. Short term trainings targeted at employability created in 2013 -
"Transversal Training" module and "Vida Ativa" measure –
have increased their implementation in 2014.
([36]) Decree-Law No. 13/2015, 26 January 2015
([37]) Two new
measures, covered by the Youth Guarantee Implementation Plan, were adopted in
July 2014: Active Youth Employment Programme (offering
socio-professional integration of young people with low qualifications and
furthest from the labour market, within a work project of limited time duration)
and Investe Jovem Programme (a financial and technical support
granted to young unemployed, between 18 and 30 years old, who present a viable
business idea). The Retomar programme, another new measure, consists of
a yearly financial support for students who have dropped out of education,
providing incentives for them to complete their studies.
([38]) Electricity and natural gas were shifted from the reduced
rate (6%) to the standard rate (23%) in late 2011; foodstuffs and restaurants have
been taxed at the standard rate (23%) since 2012, having previously been
subject to the intermediate rate (13%). VAT rates for cultural services and
sporting events were also raised in 2012. 
([39]) '2012 Update Report to the Study to
quantify and analyse the VAT Gap in the EU27 Member States', p. 64:    http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat_gap2012.
([40]) ZEW (2014), 'Effective tax levels using Devereux/Griffith methodology',
Project for the European Commission.
([41]) IMF Country Report No 14/306, October 2014.
([42]) According to Bettio et al. (2013), women's
mean monthly pension income in Portugal was EUR 512, compared with EUR 766 for
men. According to the Social Security statistics and the CGA annual report for
2012, average monthly pensions under the general statutory scheme and the CGA
were EUR 402 and EUR 1287 respectively.
([43]) This relative improvement in the income situation of the elderly
may be explained by shrinking wage incomes, rather than by any actual
improvement in pensioners’ incomes.
([44]) The 2015
Pension Adequacy Report 
(forthcoming) provides a projection of replacement rate levels for 2053,
pointing to a fall from 92.3% of average earnings in 2013 to 79.5% in 2053; for
low earners (66% of average wage) the fall is steeper, from 90% to 77.6%.
([45]) These
projections will be updated in the first half of 2015 when the new Ageing
Report 2015 is published.
([46]) The poverty gap is defined as the difference between the median
equalised total net income of people below the at-risk-of-poverty threshold and
the at-risk-of-poverty threshold, expressed as a percentage of the
at-risk-of-poverty threshold. It gives an idea of the severity of poverty for
those experiencing it.
([47]) The increase amounted to 7.6 percentage points with respect to 2008.
([48]) See De Agostini et al. (2014), 'The effect of tax-benefit changes
on the income distribution in EU countries since the beginning of the economic
crisis', EUROMOD Working papers 9/14.  https://www.iser.essex.ac.uk/research/publications/working-papers/euromod/em9-15
([49]) Decree-Law 133/2012.
([50]) Baptista et al. (2014). Portugal Country Profile, European Social
Policy Network.
([51]) The minimum pension was adjusted by
more than the inflation rate and the minimum wage was increased from EUR 485 to
EUR 505 in October 2014, contributing to protecting lower pensions and low
income earners. The temporary 10% increase in unemployment benefits for couples
where both partners are unemployed and have dependent children was maintained.
Active Labour Market Policies have been streamlined and take into account the
(re)integration of vulnerable groups in the labour market. The Solidarity
Complement for the elderly with low pensions was also maintained, having a
positive impact on the lowest incomes of the elderly. 
([52]) Commission services calculations based
on the OECD tax and benefit model.
([53]) The slight increase in 2012-13 might
reflect the reforms introduced on unemployment benefits (reducing the period
necessary to become eligible) in 2012.
([54]) Available at: http://www4.seg-social.pt/estatisticas.
([55]) PISA 2012
results and Preliminary analysis of the 2013 national final exams: GAVE. Análise Preliminar dos Resultados — Provas finais de ciclo: Exames
finais nacionais 2013.
([56]) According to Eurostat data,  tertiary
education attainment rate increased 10 pp from 2008 to 2013 and employment rate
of graduates decreased 15 pp during the same period.
([57]) In 2014, the number of applications to
higher education rose for the first time since 2008 and the number of students
placed in vocational courses at polytechnic institutes, increased by 18%
compared to 2013. The employment rate of graduates is well below the EU average
and only very marginally higher than that that of young people having completed
only lower secondary education. 
([58]) In 2012, over half (55%) of the
Portuguese population had low digital skills or none at all, and only 24% of
individuals were empowered with above basic digital skills. As for the
workforce, 48% of individuals had none or low digital skills (39% in the EU).  Only
1.7% of employed people were ICT specialists, whereas the EU average is 2.8% of
ICT specialists in the workforce.
([59]) Monteagudo et al. (2012), 'The economic
impact of the Services Directive: A first assessment following implementation',
European Commission Economic Papers 456, June 2012, p.30. The 0.8% increase was
estimated for a reform effort until 2011. 
([60]) Banco de Portugal and ECB Lending
Survey, November 2014.
([61]) Survey on the access to finance of
enterprises in eth euro area, European central Bank, November 2014.
([62]) 2014 SBA factsheet
Portugal, European Commission, 2014.
([63]) In 2012 public expenditure on R&D financed by business
enterprises was very low (0.007% of GDP), pointing to a very low level of
cooperation between business and science, with Portugal among the bottom five
EU countries. In 2011 the number of public private scientific co-publication
per million people stood at 17 in Portugal (EU average: 53). 
([64]) Portugal scores 19 in the Innovation Union Scoreboard 2014 and 24
in the European Innovation Output Indicator 2014. 
([65]) As regards the five main drivers of the
digital economy, Portugal ranks 13th out of 28 Member States for
connectivity, 20th for human capital, 15th for  use of
internet services, 12th for  integration of digital technologies by
business, and 7th for digital public services.  
([66]) Estatísticas trimestrais sobre ações executivas cíveis (2007-2014),
Bulletin 20, http://www.dgpj.mj.pt/sections/siej_pt/destaques4485/estatisticas-trimestrais9480/,
Q2 2014 data, p. 2
([67]) The 2012 urban lease law envisaged a 5 year transitional period
for the existing open-ended lease contracts signed before 1990 (around 30% of
the total contracts), taking into account social criteria for vulnerable
households and micro entities for commercial leases. An additional 2 year
transitional period was foreseen for the commercial lease regime under certain
circumstances.
([68]) The government effectiveness indicator is developed by the World
Bank as part of its Worldwide Governance Indicators (WGI) project (http://info.worldbank.org/governance/wgi/index).  
([69]) European Commission, Member States' Competitiveness Report 2014:
Reindustrialising Europe (http://ec.europa.eu/DocsRoom/documents/6748/),
chapter 2.
([70]) The following categories are used to
assess progress in implementing the 2014 CSRs of the Council Recommendation: No
progress: The Member State has neither announced nor adopted any measures
to address the CSR. This category also applies if a Member State has
commissioned a study group to evaluate possible measures. Limited progress:
The Member State has announced some measures to address the CSR, but these
measures appear insufficient and/or their adoption/implementation is at risk. Some
progress: The Member State has announced or adopted measures to address the
CSR. These measures are promising, but not all of them have been implemented
yet and implementation is not certain in all cases. Substantial progress:
The Member State has adopted measures, most of which have been implemented.
These measures go a long way in addressing the CSR. Fully addressed: The
Member State has adopted and implemented measures that address the CSR
appropriately.